Brazil builder bribery probe to hit econ­omy

Scan­dal threat­ens to de­rail Rouss­eff’s plans to boost na­tion

The Star Early Edition - - BRICS FOCUS - Anna Edger­ton and Sab­rina Valle

THE COR­RUP­TION scan­dal at Petroleo Brasileiro that has spread to Brazil’s big­gest builders is threat­en­ing to de­rail Pres­i­dent Dilma Rouss­eff ’s ef­forts to re­vive Latin Amer­ica’s largest econ­omy.

The TCU, a fed­eral court that acts as a pub­lic-spend­ing watch­dog, said it was con­cerned the probe into an al­leged money laun­der­ing and bribery scheme dubbed “The Car Wash” could de­lay in­fra­struc­ture projects across Brazil.

Ode­brecht, Queiroz Gal­vao, OAS and six other builders whose head­quar­ters have been searched or ex­ec­u­tives ar­rested hold at least 70 bil­lion reais (R303bn) in Petro­bras and gov­ern­ment con­tracts, in­clud­ing for the 2016 Olympic Games and hy­dro­elec­tric dams in the Ama­zon.

With Brazil’s in­fra­struc­ture con­sis­tently ranked among the worst in the world, any de­lays to new roads or other projects will hurt in­dus­tries rang­ing from man­u­fac­tur­ing to farm­ing. That will make it harder for Brazil to boost growth after slip­ping into a re­ces­sion in the first half of the year.

“Brazil will prob­a­bly have low growth in 2015, and ob­vi­ously this won’t help,” Car­los Kawall, the chief economist at Banco J Safra in Sao Paulo, said. “You have the is­sue of the ca­pac­ity of th­ese com­pa­nies, if they are fi­nan­cially af­fected, to carry out their obli­ga­tions.”

Ode­brecht’s projects were on sched­ule and it won work with Petro­bras legally through pub­lic ten­ders, it said. Queiroz Gal­vao, OAS and Petro­bras did not re­spond to re­quests for com­ment on the eco­nomic im­pact of the cor­rup­tion in­ves­ti­ga­tions.

Jorge Ger­dau Jo­han­npeter, the chair­man of Ger­dau, Brazil’s big­gest maker of long steel, warned last week that any slow­down in projects would “ab­so­lutely” af­fect eco­nomic growth.

Marcelo Car­valho, BNP Paribas’ chief economist for Latin Amer­ica, said on Mon­day that the scan­dal could have a “sig­nif­i­cant im­pact” on gross do­mes­tic prod­uct (GDP) should Petro­bras cut its $220.6bn (R2 tril­lion) in­vest­ment plan. “There’d be a cas­cad­ing ef­fect forc­ing Petro­bras con­trac­tors to also re­duce in­vest­ments,” he said in a con­fer­ence call.

A 10 per­cent cut in Petro­bras’ cap­i­tal ex­pen­di­tures would curb GDP growth by 0.5 per­cent­age points, LCA, a Sao Paulobased con­sult­ing firm, said in a re­search re­port last week.

Brazil is ex­pected to re­port this week that the econ­omy grew 0.2 per­cent in the third quar­ter, ac­cord­ing to the me­dian es­ti­mate of 34 econ­o­mists in a survey. That fol­lows backto-back quar­terly con­trac­tions in the first half of the year.

Rio’s econ­omy “will be im­pacted by the cri­sis at Petro­bras”, state Eco­nomic De­vel­op­ment sec­re­tary Julio Bueno said this week. The builders were “the same as banks – too big to fail”.

A fed­eral court said it was con­cerned the probe into al­leged money laun­der­ing… could de­lay projects.

Rouss­eff ’s press of­fice didn’t re­spond to an e-mail seek­ing com­ment on how the cri­sis will im­pact the econ­omy.

Ser­gio Moro, the judge pre­sid­ing over the case in Cu­ritiba, Brazil, ruled against freez­ing the ac­counts of com­pa­nies un­der in­ves­ti­ga­tion, cit­ing con­cern such a move would be a ma­jor blow to Brazil’s econ­omy. Pros­e­cu­tors had re­quested block­ing funds equiv­a­lent to as much as 10 per­cent of the con­tracts un­der in­ves­ti­ga­tion.

A fed­eral pros­e­cu­tor has also asked the TCU to ban con­trac­tors in the probe from bid­ding on new con­tracts with Petro­bras.

“Con­sid­er­ing the mag­ni­tude of the crimes and the ex­tended pe­riod of time, there is no pos­si­bil­ity to im­me­di­ately block 5 per­cent or 10 per­cent of the con­tracts with Petro­bras,” Moro wrote in the Novem­ber 13 decision. “Th­ese are the largest con­trac­tors in the coun­try.”

Brazil is con­sis­tently ranked as one of the most graft-rid­den coun­tries by the World Eco­nomic Fo­rum, which listed it 133rd of 148 coun­tries for di­ver­sion of pub­lic funds in its Global Com­pet­i­tive­ness Re­port.

Even with­out their as­sets frozen, Petro­bras and builders will face ris­ing costs to fi­nance projects al­ready un­der way. Petro­bras, which de­layed re­leas­ing third-quar­ter earn­ings be­cause of the in­ves­ti­ga­tion, said on Novem­ber 13 that it planned to publish unau­dited state­ments within a month.

Bank of Amer­ica said Petro­bras might have dif­fi­cul­ties bor­row­ing in in­ter­na­tional debt mar­kets un­til it pro­vided re­sults that had been au­dited.

Fitch Rat­ings in a state­ment last week put all Brazil­ian heavy con­struc­tion com­pa­nies on neg­a­tive watch un­til there was more clar­ity on the re­sults of the in­ves­ti­ga­tion.

The le­gal bat­tle could al­low for­eign builders such as Paris­based Tech­nip to gain mar­ket share, ac­cord­ing to law firm Mat­tos Filho. – Bloomberg

PHOTO: BLOOMBERG

File photo of Petro­bras’ head­quar­ters in down­town Rio de Janeiro. Nine builders un­der in­ves­ti­ga­tion hold at least 70 bil­lion reais (R303bn) in Petro­bras and gov­ern­ment con­tracts.

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