Brazil waits for signals from Lula da Silva; investors brace for Petrobras dividend era’s end

These are days of tense calm in Brazil, at least in the business world.

In a highly polarized campaign, little – or nothing – is known to date about the government program of president-elect Luiz Inácio Lula da Silva (Workers’ Party – PT, left).

Analysts and local media refer to the messages that the then-leftist candidate launched during the campaign regarding the ideas he brought for his administration.

The market is waiting to know the measures and names of those who will accompany him in the administration, especially that of his Minister of Economy.

Meanwhile, the leading investment banks and rating agencies are looking to know his plans to change the fiscal rules and microeconomic policies and if these will be moderate, as his first speech after Sunday’s victory was interpreted.

“Lula da Silva will be quite limited to make major reforms because he does not have a majority (in Congress); so he will not be able to do what he wants, and I doubt he will be able to go back, for example, in the case of privatizations,” Gustavo Segré, international analyst and partner of Segré & Asociados, told DF SUD.

Daniel Velandia, the chief economist of Credicorp Capital, agreed with him and assured that “there is a certain degree of optimism due to the composition of the Congress, which will lead the president to negotiate.

“Therefore, the expectation is that radical changes to the economic model or something that leads to a significant deterioration of the economy and the fiscal accounts do not seem to have a high probability of occurrence”.

EYES ON THE CROWN JEWEL

In the business world, there is consensus that retail, education, and construction will benefit the most from the new administration.

But, in the middle of the debate on the impact of da Silva’s arrival is the state-owned oil company Petrobras which, according to Segré, in previous Workers’ Party governments “functioned as petty cash”.

The expert estimated that “on this occasion, that will not be so easy and possible.”

At the same time, the rating agency Moody’s, even though it warned that the company continues to be “vulnerable to political interference”, recognized that “there are now more solid protections, under the new laws governing state companies, so there is little risk of Petrobras falling into another corruption scandal of the magnitude of Lava Jato”.

Despite this, the market has already corrected target prices, and the rating agencies are changing their recommendations on Brazil’s largest company in terms of revenues and capitalization.

There is already talk of the return of heavy allocations in refining, which means the end of the dividend bonanza. The company was the largest corporate dividend payer in the world in the second quarter of 2022, according to research by fund manager Janus Henderson.

On Thursday, November 3, the company reported the payment of US$0.65 per outstanding preferred and common share.

It said that “in the 2022-26 Strategic Plan, the investment projects requested by the business areas were fulfilled because they presented good resilience and are supported by operating cash generation and investment flow, without adverse effects on leverage”.

All this, then, is about to change. According to Segré, “the market is already assimilating that there will be no more distribution of dividends at Petrobras.

“In addition, there is speculation that this government will not be able to use the company to manage illicit resources as it did in the past, but if it is not determined who will lead Petrobras, the loss in the value of its shares will continue.”

The government holds 36.61% of the company.

In JP Morgan’s opinion, the shares will only emerge from a volatile scenario when there is clarity on the plans for the company, which will probably take at least the first six months of the new term.

BTG added in a report that “while we are confident that many mistakes of the past will not be repeated (…), investors cannot underestimate the new government’s ability to use Petrobras as a vehicle to drive economic growth, investment, employment, and energy security.”

What is clear is that the new administration has openly criticized the company’s management and has indicated changes.

The name of Jean Paul Prates (PT senator and da Silva’s ally) is already mentioned as one of the figures to take over as executive president of the company as of January 1, 2023.

According to Valor Econômico, the PT aims to achieve a relatively smooth transition. Once the new board takes office, investments will be analyzed to select profitable projects that guarantee a return.

Lula da Silva’s manifesto calls for the state-owned company to return to being an “integrated energy company”, present in fertilizers, renewable energies, and biofuels, areas it once decided to abandon to concentrate on its primary activity of pumping crude oil in deep waters.

The 76-year-old politician also wants to work towards national self-sufficiency in refined derivatives, such as gasoline and diesel, and to stop charging international prices for fuels sold in the country.

TIME FOR REFORMS?

In another scenario, despite the balance of political forces in the Legislative Branch, many analyses point to the need for reforms to be implemented, and all point to the fact that this will be the greatest challenge for the Executive.

According to The Economist, “Brazil needs a government that makes 21st-century reforms, and there is no certainty that da Silva will achieve this”.

Meanwhile, Goldman Sachs warned that “the fiscal outlook will visibly deteriorate in 2023, from a fiscal surplus forecast in 2022”; therefore, Lula will have to accommodate significant spending pressures.

“We expect President-elect Lula to pursue a tax-and-spend strategy given the deep crisis in the public sector, and state-owned enterprises should be key drivers of growth and investment.

“Such a strategy could lead to higher consumption growth in the short term and high inflation and higher fiscal and current account deficits.”

Asked about the possibility of promoting tax reform, as the new governments of Colombia and Chile, for example, have done, Segré recalled that it had been tried since the government of Fernando Henrique Cardoso in 1989, and it has not been achieved.

“It is very difficult to know if it will be done and, above all, if it will be tried with the minorities in the Chamber of Deputies and the Senate.

“So far, there is speculation that da Silva will defend the fiscal surplus because he did it in his first government, but it is another era as well.”

With information from DF SUD