Brazil – Tomorrow Still Just a Day Away

Earlier this week (August 23), Brazil announced an ambitious plan to privatize ownership of some 57 state-owned assets in hopes of raising R$44 billion (about $13 billion US$.) Among the assets to be sold are fourteen airports, eleven electric transmission lines, and fifteen port terminals.

Assuredly with advance notice of the government’s fiscal shape-up plan, S&P earlier this month removed the country from credit watch negative and affirmed its credit rating at “BB”.

The sale of state-owned assets is being made out of necessity. Just the week before, Brazil’s government announced it was increasing the nation’s budget deficit target in 2017 from R$139 billion to R$159 billion and further reducing expenditures.

S&P stated that one of the reasons for its relatively positive action was that President Michel Temer had survived a corruption charge recall vote earlier this month, ensuring that there will be some stability in government for the near future. The political stability will not be without turmoil, however. Brazil has been severely challenged by political scandals that continue to unfold.

“Operation Carwash” began over three years ago as an investigation into bid-rigging, kickbacks and other illegal acts of corruption at Brazil’s oil giant Petrobras. Once uncovered, the web of corruption was found to stretch throughout the country’s political and business infrastructure. Soon over 80 politicians, from all ends of the political spectrum, and many members of Brazil’s business elite were implicated in various ways.

Luiz Inacio Lula da Silva, former Brazilian President, was convicted on a corruption charge that he had been given a beachfront apartment by an engineering firm in return for his help in winning contracts with Petrobras. He has been sentenced to nine-and-a-half years in prison, although he will not be jailed until the outcome of an appeal.

Marcelo Odebrecht, former CEO of Oderbrecht, Latin America’s largest construction conglomerate, was found guilty of paying more than $30m in bribes to Petrobras officials and is serving a 19-year prison sentence. The 76-year-old Mr. Odebrecht and people close to him are cooperating with the government, and certain of their allegations could result in further scandal at the highest levels of industry and politics.

Dilma Rousseff, Lula’s successor as Brazilian President, was impeached and removed from office a year ago (August 2016) on charges that she engaged in accounting fraud in illegally moving funds within the government budgets to conceal deficits and maintain certain popular programs to help her chances to be re-elected.

Joesley and Wesley Batista, the principals behind the rapid growth of meatpacking colossus JBS, admitted to Brazilian prosecutors in May 2017 that their corrupt political dealings enabled them to unduly receive billions of US dollars in financing from the Brazilian development bank BNDES. Inappropriate access to BNDES’s massive balance sheet enabled JBS to rapidly become the largest meat packer in the world, with subsidiary JBS USA the second largest beef packer in the U.S., with 2016 sales of $14 billion. Part of JBS’s meteoric rise also included its relatively recent purchase of popular US-based brands Swift and Pilgrim’s Pride.

The revelations in the Batista – BNDES scandal stretch beyond the global M&A world down into local Brazilian political precincts and involve hundreds of millions in systemic bribes reaching over 1,800 politicians and government officials, including food inspectors.

Earlier this year, the US suspended all fresh beef imports from Brazil. The U.S. Department of Agriculture said “recurring” safety concerns that resulted in it rejecting 1.9 million pounds of fresh Brazilian beef imports since March, or 11 percent of the total, compared with 1 percent of shipments from other nations. (Note: Brazilian beef counts for less than 2% of the beef consumed in the US and its ban will not affect the inflation rate in the US, discussed elsewhere in this week’s report.)

Skepticism about the fifth largest country in the world’s lack of national cohesion, leadership, and will underlies the old saw that “Brazil is the country of the future – and always will be.” S&P’s rating decision this past week on Brazil’s bonds reflects the same skepticism. S&P stated that it continues to officially have a negative outlook on the rating, implying a one in three chance of a downgrade in the next six to nine months. “Failure by Congress to advance key pieces of fiscal-related legislation would suggest the absence of political resolve, and we could lower the ratings on weaker assessment of governability and policy commitment across branches of government.”

About Chris Donnelly

Christopher J. Donnelly, is an experienced attorney, bond analyst and fixed income strategist, with years of experience in structured finance, distressed bonds and bond related litigation in a variety of industries and the emerging markets. He is a graduate of Rutgers University (BA), The University of Pennsylvania (JD) and New York University, (LLM in Taxation). Chris is a Managing Director of Straacom, LLC and can be contacted at Straacom provides strategic research, analysis and communications for publication and on assignment for private clients.

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