Judicial development threatens privatisations in Brazil

Since Michel Temer become president in August 2016, Brazil has implemented a range of pro-market policies designed to reboot the country’s economy. An important part of this was Temer’s privatisation agenda, however this is now being challenged by political and judicial developments.

Summary

Since replacing his impeached predecessor, Dilma Rousseff, in late 2016, President Michel Temer has pursued a heavy pro-business agenda to kickstart the country’s ailing economy. As part of this agenda, Temer’s government has sought to reduce Brazil’s large budget deficit by selling off numerous state assets. The president’s privatisation agenda hit a major obstacle on 27 June when a supreme court justice ruled that sales of state assets must receive congressional backing, leading to the suspension of various sales. With the outcome of the country’s October general election highly uncertain, the long-term prospects for the current government’s privatisation agenda are unfavourable.

Overview   

Facing a severe recession, 8 per cent inflation, and a spiralling budget deficit approaching 9 per cent of GDP upon taking office in August 2016, President Michel Temer implemented a series of pro-market policies designed to rebalance Brazil’s public finances and attract domestic and international investment. While Brazil has been governed by a range of ideologies since democracy was restored in 1985, Temer – from the centrist Partido Movimento Democrático Brasileiro (PMDB) – is the country’s first leader who is not a member of Partido dos Trabalhadores (P.T.) since 2002. While supporters credit P.T. leaders Luiz Inácio ‘Lula’ da Silva (2003-2011) and Dilma Rousseff (2011-2016) with expanding the country’s middle class and reducing poverty, the party was unable to rebalance the country’s public finances after commodity prices fell sharply in 2014 and 2015, leaving the country with an enormous budget deficit. A key reason for this was constitutionally mandated spending and indexation – approximately 90 per cent of federal government expenditure, such as on social security payments and transfers to states and municipalities, was determined by the constitution and could only be reduced via a constitutional amendment.

While Brazil has been governed by a range of ideologies since democracy was restored in 1985, Temer – from the centrist Partido Movimento Democrático Brasileiro (PMDB) – is the country’s first leader who is not a member of Partido dos Trabalhadores (P.T.) since 2002.

While Temer has enacted a series of fiscally conservative, pro-market measures since becoming president, including passing an unpopular constitutional amendment limiting public spending growth to the rate of inflation for the next 20 years, perhaps the most commercially significant move is his sweeping privatisation agenda, just two weeks after becoming president. Dubbed ‘Projeto Crescer’, the plan included the auction of numerous infrastructure and oil concessions, as well as the sale of six power distributers from state-owned electricity giant Eletrobras, Latin America’s largest power company. Temer’s policy marked a significant departure from the country’s approach to state-owned industries – unlike neighbouring countries which undertook large-scale privatisations in the 1980s and 1990s, Brazil has maintained a strong state role in strategic sectors of the economy, including in energy giants Petrobras and Eletrobras, as well as aerospace conglomerate Embraer. In August 2017, the government put a further 57 state assets on sale, including oilfields, highways and São Paulo’s Congonhas airport (CGH).

Supreme court decision

On 27 June 2018, Brazilian supreme court justice Ricardo Lewandowski issued a landmark ruling which stated that the sale of shares in state-controlled companies and their subsidiaries must be approved by the country’s congress. Lewandowski’s decision, which is likely to be approved by the full court when it returns from recess in August, was immediately contested by government ministers who offered alternative interpretations of the ruling.

Brazil’s congress reacted quickly to the decision, with the lower house approving a draft bill on 4 July permitting the sale of the six Eletrobras power distributers, while mines and energy minister Wellington Moreira Franco declared that the government would appeal the verdict. Despite this, five of the six sales were subsequently suspended until 30 August amid the legal uncertainty brought about by the ruling, while Petrobras also suspended various asset sales because of the justice’s decision. Temer’s privatisation plans suffered a further blow on 11 July when lower house speaker Rodrigo Maia announced that a bill allowing the government to divest one-third of its stake in Eletrobras would not be voted on until the next congressional term begins in the new year.

For firms interested in acquiring state assets, the ruling not only creates delays and uncertainty over planned sales, but also comes at an inopportune moment in the electoral calendar.

For firms interested in acquiring state assets, the ruling not only creates delays and uncertainty over planned sales, but also comes at an inopportune moment in the electoral calendar. As Brazil gets closer to its October general election, parties will increasingly be unwilling to participate in the legislative coalitions required to approve privatisations as they seek to differentiate themselves from their rivals and switch focus to the election campaign. For multinational companies considering purchasing state assets, the recent legal development will have disrupted strategic planning and raised questions about the impact of October’s general election on their investment. Furthermore, the ruling is likely to stall any mooted attempt to privatise parts of Brazil’s banking sector, including the Caixa Econômica Federal and Banco do Brasil banks, until at least January 2019 when the next administration takes power.

Outlook

In the six-month outlook, firms should anticipate lengthy delays to the sale of state-run companies and their subsidiaries. While the current lower house of congress backed the sale of Eletrobras power distributers, privatisations are unlikely to receive further support in the next three months as legislators concentrate on re-election campaigns. Furthermore, with approximately two-thirds of Brazilians opposing privatisations according to opinion polls, as the elections approach it is highly likely that congress will oppose other attempts to privatise state assets such as Petrobras, which although tarnished by its involvement in the Lava Jato (Operation Car Wash) corruption scandal, remains an emblematic state firm.

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