Latin America’s oil industry during Covid-19

This week, we give you an overview of the oil industry in Latin America. Bolsonaro’s Church v. State dilemma. And Brazilians’ increasing access to banks.

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The state of the Latin American oil industry during Covid-19  

Back in March, Petrobras CEO Roberto Castello Branco said the coronavirus pandemic could spark “the worst oil crisis in a century.” Indeed, 2020 has proven to be a truly dreadful year for the industry, with Brent spot prices crashing from USD 67 back in January to just USD 39 today. Oil-rich Gulf nations have been forced to slash spending and borrow money, in a risky strategy as the outlook for oil continues to be uncertain. Latin America reporter Lucas Berti and I explain how the 2020 oil crisis has impacted the region:

Brazil. Shares of the country’s state-owned oil giant Petrobras are actually higher now then on March 11, when the World Health Organization declared a pandemic and Russia and Saudi Arabia were fighting an oil price war. But the company still has many questions to answer:

• The company’s divestments program sees Petrobras focusing on oil extraction. Leadership wants to sell off assets in the North, Northeast, and South regions — concentrating their operations instead in the states of Rio de Janeiro and São Paulo (where the deepwater pre-salt reserves are). But before leaving their operations in these regions, Petrobras will have to negotiate billions in tax, labor, and environmental debts.
• Moreover, the company is accused of falsely imprisoning 73 workers during a strike in February. Labor prosecutors say Petrobras prevented these workers from leaving their position until replacements arrived — with some working 11 straight days — and are asking judges to slap a BRL 100-million fine on the firm along with individual reparations of BRL 100,000.

Argentina. The oil sector has nearly stopped operations completely in Argentina, as only five oil-drilling rigs are currently operating, according to oil tech firm Baker Hughes. Current production is down to 1940 levels (fewer than 300,000 barrels a day). Experts predict that Argentina’s output will reach an average of 400,000 to 500,000 barrels a day by 2024.

Mexico. The oil industry represents roughly 6 percent of the Mexican GDP — a share that stood between 9.4 and 10.8 percent from 1996 to 2008. Pemex, the state-owned oil company, is the single largest tax contributor to the Mexican government, reduced losses in Q2 2020 when compared to one year ago (USD 1.9 billion), but overall revenue has been halved over the same period. Pemex’s debt reached USD 107 billion, hampering its long-term growth projections.

• Moreover, as we at The Brazilian Report explained in September, a massive corruption scandal has rocked Pemex. Former chief executive officer Emilio Lozoya is accused of pocketing USD 10.5 million in bribes from Brazilian construction firm Odebrecht — the company behind a veritable avalanche of corruption in Latin America and Angola.

Colombia. According to consultancy Control Risks a quarter of Colombia’s oil production could be lost by 2021, “and will never be recovered” if prices remain at current levels. Production has dropped 10 percent since Q1, and the country’s sector leader, Ecopetrol, seems more focused on its USD 1.5-billion investment in the U.S. shale gas sector.

Chile. Production in Chile fell by 12.2 percent by July 2020, worsening a downward trend that predates the pandemic. Experts say that a drop in investments will certainly be detrimental to its recovery effort. 

Between the Church and the Deficit 

There is an expression in Brazil to describe when someone wants to have it both ways: we say they are lighting ‘one candle for God, and another for the devil.’ The expression seems to fit the latest tug of war between President Jair Bolsonaro and Paulo Guedes, his Economy Minister. Under pressure from Mr. Guedes, the president vetoed a piece of legislation pardoning BRL 1 billion (USD 188 million) in unpaid tax fines to churches. But then asked Congress to strike down his own veto.

What is behind the move. Brasília correspondent Débora Álvares explains that Jair Bolsonaro is trying to maintain the support of the evangelical caucus — which includes 187 congressmen (of 513) and eight senators (of 81). Last week, the president was determined not to veto the pardon, and ordered his aides to find legal arguments to back him.

• Economic advisers, however, warned the president that granting BRL 1 billion in tax pardons — especially in a moment when the government is cash-strapped — could be considered an infringement of Brazil’s fiscal responsibility laws (which is an impeachable offense).

What he is saying. On Twitter, Mr. Bolsonaro called the fines “absurd,” and said that he only vetoed it as a way to avoid an “almost certain impeachment process.” But added: “I confess that, were I a representative or senator […] I’d vote to strike the veto down.”

Why it matters. This is not the first time Mr. Bolsonaro shows that he puts his personal alliances before fiscal stability.

• Last year, he made churches exempt from the ICMS tax (a levy on goods and services) until 2033. And under the government’s auspices, the evangelical caucus has been working on muscling its way into using the tax reform being discussed in Congress as a way to enhance their already very generous tax exemptions.

Church and state. The rise of evangelicals in politics has created new forms of corruption in Brazil. Just this weekend, Rio prosecutors revealed that there is evidence that Mayor Marcelo Crivella used the Universal Church of the Kingdom of God (where he is a bishop) to launder billions siphoned from City Hall.

Markets

On Friday, Brazil’s second-largest pet retailer chain, Petz, raised over BRL 3 billion (USD 564 million) in the country’s biggest initial public offering of 2020. High demand boosted stock by 21 percent on the first day of trading. Suno Research estimates a target price of BRL 17.99 for Petz, considering strong future growth. Petz’s high reliance on animal feeding products and the fact it only has one warehouse for its entire supply chain are the company’s main weaknesses.

Natália Scalzaretto

More Brazilians enter the financial system

The number of Brazilians with a bank account has significantly increased over the past decade. All age brackets have seen advances — but 45 million adults still remain completely out of the banking system. Exclusion from the banking system is higher among women, blacks, low-income people, and the Northeast region (Brazil’s poorest). 

Looking ahead

• Economy. The Central Bank publishes today its Economic Activity Index (IBC-Br) for July. The index is considered to be a preview of official GDP figures. Analysts predict a +4-percent result. On Wednesday, the bank will also decide on Brazil’s benchmark interest rate for the next 45 days. Markets expect the current 2-percent-a-year rate to stay unchanged.
• Elections. Parties have until Wednesday to decide on their candidates for the 2020 municipal elections. In two months, 147.9 million voters will elect new mayors and city councilors across the country — the sole exception is Brasília. The federal capital has a state-like status and is run by a governor.
• Vaccine. British-Swedish pharmaceutical giant AstraZeneca resumes today Phase-3 trials of a potential coronavirus vaccine in 5,000 Brazilian volunteers (many of whom are health workers). The study was suspended for a week after a suspected serious adverse reaction in a UK patient.
• Government. Justice Minister André Mendonça was admitted into a hospital on Sunday after being diagnosed with acute myocarditis (an inflammation of the heart muscle). Mr. Mendonça will remain in hospital for at least 48 hours, but the latest medical report stated that he was feeling better.
• Car Wash. On Thursday, a court of appeals will decide whether or not to punish Federal Judge Marcelo Bretas for taking part in political events alongside President Jair Bolsonaro and Rio Mayor Marcello Crivella. The trial will be explosive for the Brazilian Judiciary branch, as Mr. Bretas has become the face of Operation Car Wash— and just last week authorized an operation against relatives of members of high courts accused of influence peddling (more below).

In case you missed it

• Inflation. Food prices have dramatically increased in Brazil, raising red flags in the government. President Jair Bolsonaro asked vendors to reduce their margins to “close to zero” as an act of patriotism, and the Justice Ministry ordered them to explain the reasons for price increases — but the administration says it won’t freeze prices. Food inflation weighs disproportionately on the poor and could spark mass anger among a significant proportion of the electorate.
• Trade. Despite U.S. President Donald Trump’s decision to reduce import quotas on Brazilian semi-finished steel, President Jair Bolsonaro will extend a tariff-free ethanol import program with the U.S. for 90 days, starting today. The move breaks with Brazilian diplomacy’s reciprocity principle, but the Brazilian government hopes it could open the opportunity for a free-trade deal with the U.S. The strategy could fail if Mr. Trump fails to win re-election, as challenger Joe Biden has defended a tougher stance on Mr. Bolsonaro for his laissez-faire environmental approach.
• IDB. The Inter-American Development Bank (IDB) elected as president Mauricio Claver-Carone, a Florida-born attorney best known for defending a hardline policy against Cuba and Venezuela. Besides breaking with tradition of always having a Latin American head for the bank, the U.S. move for control over the IDB scuppered the Jair Bolsonaro administration’s intention of naming the bank’s first Brazilian president. Still, Brazil’s Foreign Affairs Ministry celebrated Mr. Claver-Carone’s election.
• Big law. Operation Car Wash launched an investigation into major law firms owned by relatives of members of high courts. According to Rio de Janeiro prosecutors, law firms have become fronts for money-laundering schemes or for paying kickbacks to judges. The operation, however, did not target the judges who might have received dirty money. That is because state prosecutors have no jurisdiction over high courts — only Prosecutor General Augusto Aras can charge high court justices. Considering that Mr. Aras has been extremely subservient to President Jair Bolsonaro, this is an interesting dynamic to observe.
• Big meat. The U.S. Occupational Safety and Health Administration slapped a USD 15,000 fine on Brazilian meat giant JBS (which operates in the U.S. under the name Swift Beef) for failing to protect workers of a Colorado plant from Covid-19. Meat plants have also been linked to the rapid spread of the coronavirus in Brazil’s countryside, as working conditions increase the chances of transmitting respiratory viruses.