Bolsonaro’s ousting of Petrobras chief unnerves Brazil

Brazil’s president Jair Bolsonaro doubtless saw it as a cheap way to boost his popularity ahead of his re-election campaign. But his sudden decision to push out the widely-respected chief executive of Petrobras and replace him with a pliant army general has proved rather expensive.

About $13bn was wiped off the market capitalisation of the state-controlled oil company on Monday as traders digested Friday’s bombshell news from Brasília. Unease spread to other assets, with shares in state-controlled companies wilting, the real falling against the dollar and markets increasing their bets on an early rise in interest rates.

Investors worry that Brazil’s mercurial hard-right president may be abandoning his government’s professed commitment to free-market economics, just as the country’s sickly finances lurch deeper into the red.

Roberto Castello Branco, the chief Bolsonaro is ousting, had impressed shareholders by cleaning up a company which was a byword for scandal. Brazil’s “Car Wash” corruption probe began at Petrobras and has led to nearly 300 convictions. But he also increased fuel prices in line with international markets, irking the powerful truckers’ lobby.

Bolsonaro has nominated Joaquim Luna e Silva, a 71-year-old former defence minister, to run one of the world’s largest oil companies when Castello Branco’s two-year term expires next month. Luna e Silva’s business experience stretches to three years running a state-controlled hydroelectric dam, proceeds from which he used to build a bridge and extend a nearby airport runway. These crowd-pleasing measures did not go unnoticed in Brasília.

Bolsonaristas argue that the president’s actions are justified by coronavirus. “We’re in an environment where making energy costs for consumers in Brazil temporarily lower is hardly inappropriate,” one financier close to the government says. “Petrobras is a state-controlled oil company. Everywhere in the world, state-controlled oil companies always subsidise fuel prices.”

Were this a single mis-step, the damage might be confined to Petrobras. But public finances were disastrous even before the pandemic. Brazil has the biggest debt pile of any emerging market outside China, yet spent last year as if it had saved for a rainy day, handing out $9bn a month in “corona vouchers” to a third of the population, handily boosting Bolsonaro’s popularity in the process.

The government and congress are now negotiating a scaled-down extension to the voucher programme, which is likely to be agreed without compensating spending cuts. Capital Economics estimates that this kind of scenario would put Brazil’s government debt on an unsustainable path to reach nearly 150 per cent of gross domestic product by 2030. 

Brazil’s powerful business lobby backed Bolsonaro in his 2018 election campaign because they had tired of years of intervention from leftwing governments and yearned for reforms to make the economy more internationally competitive and cut persistently high budget deficits.

Financiers consoled themselves that while the hard-right leader might praise military rule, attack institutions such as the supreme court and threaten to decree a state of emergency, he was just playing to his “God and guns” supporters. In the end, he would always back down and be sensible on economic policy. 

What they got, in the words of one Brazilian banker, was a Faustian bargain that they were doomed to lose. The reform programme, as Alberto Ramos of Goldman Sachs puts it, is now an “empty shell”. Progress has been “extraordinarily slow”, he adds.

Attention is now turning to the fate of Paulo Guedes, Bolsonaro’s economy minister, who appointed Castello Branco. A devotee of Milton Friedman and free markets, he looks increasingly out of place in a spendthrift government. Insiders say he is unhappy over the ousting of his friend and fellow University of Chicago alumnus from Petrobras. Several Guedes appointees have resigned over the past few months, frustrated at the failure of the reform agenda.

Ilan Goldfajn, chairman of Credit Suisse Brazil and a former central bank president, says Guedes really wants to approve the constitutional reforms. “He may have accepted the intervention in Petrobras but would not accept losing on the reforms. If there are no reforms, he may resign,” he says.

With or without Guedes, what one banker calls “Brazil’s slow descent into hell” is likely to continue. As the October 2022 presidential election approaches, the choice for Bolsonaro between popular spending measures and unpopular economic reforms becomes ever simpler. That will only increase the chances that Brazil’s shaky economy will run into a major markets crisis.

michael.stott@ft.com