Will the government get out of the way?

Photographer: Dado Galdieri/Bloomberg

Brazil's Only Hope Is Mr. Market

Mac Margolis writes about Latin America for Bloomberg View. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.”
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When Brazilian Energy Minister Eduardo Braga announced recently in Houston that he wanted to scrap Brazil's oil monopoly and invite foreign drillers to bid for stakes in the country's huge new offshore oil fields, investors sat up.

With a ballooning public deficit, inflation running well above target and gross domestic product set to contract by more than one percent this year, Latin America's biggest nation could use a jolt. 

Whether Braga's declarations are a sign of real policy shift or merely a power struggle in Brasilia is an open question. It goes to the heart of President Dilma Rousseff's accident-prone government.

Agriculture minister Katia Abreu, from the same conservative political faction as Braga, told Bloomberg News earlier this week she also was weighing easing restrictions on foreigners buying land, as a way to inject capital into farm country and counter the world commodities slump.

QuickTake Brazil's Highs and Lows

Perhaps one of the biggest shifts affecting foreign investors is in the fortunes of Petrobras, the state-owned oil company.

Once rated the most valuable oil major after ExxonMobil, Petrobras fell to 416th  place on Forbes's latest industry ranking, down from 30th place a year ago. In 2007, trumpeting a huge new cache of oil deep under the Atlantic, then-President Luiz Inacio Lula da Silva restored the state-controlled oil monopoly that lawmakers had discarded a decade before.

Foreign prospectors were welcome but had to buy most of their equipment from local suppliers and partner with Petrobras, the sole operator in ultra-deep pre-salt oil fields, with a 30 percent minimum stake in all drilling contracts. Profits would flow to the government. "We have firm evidence that God is Brazilian," Rousseff, then energy minister, said in 2009.

Petrobras had the engineering acumen, but soon found itself overwhelmed by the demands of retrieving oil from under four miles of sea, sand, rock and salt. It didn't help that political apparatchiks had turned the company into a giant cash machine by skimming supply contracts to fund campaign slush funds.

"I felt shame," Petrobras's new president Aldemir Bendine said on April 22, when the company finally released its 2014 earnings, reporting more than $2 billion in write-offs caused by graft and $14.8 billion in losses for overstated assets.

The company clawed back some value in the stock market rally last month, but restoring investor confidence will take more than contrition. It was competition, not monopoly, that drove a production boom in the 1990s and led Petrobras to the largest oil find in the Western hemisphere since 1976.

"The government should end the oil monopoly, get out of the way and let Petrobras compete for concessions with other prospectors," David Zylbersztajn, former head of Brazil's regulatory National Petroleum Agency, told me, noting that delusions of grandeur nearly gutted the company.

Rousseff, who stood by Lula when he raised the barbed wire around Petrobras, has been quiet on deregulation, although the ruling Workers Party is fiercely opposed to loosening the state's grip on the oil pump.

And yet she may not have a choice. The final word on oil regulations lies with Congress, where the Workers Party has lost the lead.

Finance Minister Joaquim Levy has taken note and struck a deal with coalition rebels to advance a severe austerity plan, and recently called on lawmakers to move beyond fiscal adjustment to an agenda for growth.

The mess in Brazil has backed Rousseff into the market-friendly reforms that she has always rued, but which may be the only way to rescue the tanking economy and her sinking fortunes. God may not be Brazilian, but seems to have her back.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mac Margolis at mmargolis14@bloomberg.net

To contact the editor on this story:
Philip Gray at philipgray@bloomberg.net