Investors Run For Exit As Brazil Lets Politicians Run State-Run Firms

Brazilian financial markets were left in turmoil after the lower house of Congress voted late on Tuesday to make it easier for politicians to take roles at state-run firms, causing a market rout on Wednesday, Reuters reports. 

The bill, which now heads to the Senate, seeks to cut the quarantine for people with decision-making roles in political parties or electoral campaigns to take positions at state-owned companies from 36 months to just one month.

Shares in state-run firms were some of the hardest hits, with oil company Petroleo Brasileiro SA aka Petrobras (NYSE: PBR) dropping nearly 8% since the development and lender Banco do Brasil SA (OTCPK: BDORY) falling over 5%. Meanwhile, Brazil's real tumbled as much as 1.2% against the dollar in the wake of the news. 

Petrobras has been at the center of a major corruption scandal over the past decade, due in large part to political appointments in its senior management. The sell-off comes at a time when Petrobras was regaining its footing. 

Last week, the oil and gas supermajor announced that it will increase 2023-2027 investments by about 15% to $78 billion over the company’s 2022-2026 projected spending. Of the $78 billion planned for capex, 83% or $64 billion is earmarked for E&P activities while 67% of the E&P capex budget will go to pre-salt activities. 

The company also plans to boost spending to reduce carbon emissions to ~6% of the total compared with 4% in the previous plan, and will see its decarbonization fund more than double the current $248M.

Analysts at BTG Pactual say the revised law is bad for governance at state-owned firms since it will eliminate one of their main mechanisms of defense from political influence. 

Goldman Sachs has also stressed fears that the large majority that led to the passage of this bill portends a new government that could have “enough political capital to gather congressional support and make further adjustments to the law", as reported by Reuters. 

The Congress vote was passed on the same day that President-elect Luiz Inacio Lula da Silva announced a veteran from his Workers Party, Aloizio Mercadante, as the next head of state development bank BNDES. This move likewise upset financial markets despite earlier statements by officials that there were no plans to change the State-Owned Enterprise Law.

By Alex Kimani for Oilprice.com

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