Is corruption destroying Brazil?
Brazil’s Petrobras scandal isn’t the simple disgracing of a badly run company. It’s a scandal that involves top politicians with dire economic ramifications, a scandal about a Government-backed corporation which used to generate revenue worth 8% of the entire country’s gross domestic product. And it couldn’t have come at a worse time.
The oil giant has been accused of overpaying its suppliers who then illegally passed some of the profit back to company executives and politicians. Last Wednesday, in its first audited financial statements to be released in over eight months, the gravity of the situation became apparent. Petrobras reported a quarterly loss of $8.8 bln and now owes a total debt of $170 bln. Thousands of workers have been left unemployment and multiple of its suppliers and partner companies have been forced to file for bankruptcy.
Its bad news for the Brazilian economy. Petrobras not only supplies 87% of the country’s oil output, but also accounts for more than 10% of all investment. Its stock price has lost over one third of its value in the last year, and the country as a whole is now paying the price for its dependency. Analysts have estimated that Brazil’s gross domestic product could drop 1.5% this year as a direct result of the scandal.
For Brazil, which already has a government deficit of around 66% of the GDP, the timing amplifies the problem. Firstly, there’s the dollar factor. Already this year the US dollar has gained over 14% against the Brazilian real. Now, as the US Federal Reserve is expected to increase interest rates, dollar-denominated debt will be even more difficult to repay.
Secondly, the abysmally low oil prices are already hurting the country’s commodity-driven economy and reducing the value of Petrobras’ output. To relieve some of its debts, the company announced plans to sell an estimated $13.7 bln worth of assets, but obtaining a decent price could prove tricky given the current fundamentals.
Thirdly, the news has created a wave of political uncertainty. President Dilma Rousseff narrowly won with just 51.6% of the vote in October’s passionately contested election. She promised to unify the country, strengthen the economy, and reduce corruption. Her pledges and efforts may now be undermined. Rousseff herself was chairwomen of Petrobras between 2003 and 2010, and although she isn’t implicated directly in the current scandal, many Brazilians have taken to the streets and hold her and her government responsible for the high level of corruption that is threatening their society.
So can Brazil pull itself back up? I wouldn’t be surprised if it falls into recession later this year, but it’s worth remembering that this is still the world’s seventh biggest economy. Even with the odds stacked against it at present, Brazil has tremendous long-term potential. Rousseff knew that was taking on a challenge six months ago. Now she must prove that she can handle the pressure.