Update from Brazil: The Strike is Over!, With Consequences To Come

One of the principal demands of Brazil’s striking truckers and oilworkers was a return to a subsidized oil price, protecting Brazilians from international price fluctuations and macroeconomic trends. The principal advocate and architect of this shift (outside of President Michel Temer), was Pedro Parente, who assumed the role of Petrobras’ CEO in the wake of the impeachment of Dilma Rousseff and at a low point in investor and broader outsider confidence.

In his tenure as CEO, Parente’s role was to “re-privatize” Petrobras, which controls 90% of Brazil’s oil and gas production. The company is a curious hybrid of public and private, as the Brazilian state is far-and-away the company’s largest shareholder (64%), yet the company is listed on both the Brazilian (Bovespa) and NYSE stock exchanges, and therefore subject to investor criticism and a ever-fluctuating stock price. During Parete’s tenure, Petrobras has been a hugely successful investment, and saw a eight-year high in its market valuation (company value) just days prior to the strike.

petrobras_1

Petrobras ($PBR) stock price, May 2016 – May 2018 (Yahoo Finance)

In the wake of President Temer’s decision to re-subsidize oil prices, and cave to the multitude of other demands made by the truckers over the past two weeks, Parente has resigned from his position as CEO. In his resignation letter, addressed to the “President of the Republic”, Parente writes:

Today, Petrobras is a company with a recovered reputation, safety indicators in line with the best companies in the sector, very positive financial results, as demonstrated by the last disclosed results, debt on a clear reduction trajectory and a strategic plan that has shown itself capable of responsible and lasting investment, generating jobs and wealth for our country. And all this without any capital contribution from the National Treasury, according to our initial conversation. It seems to me, therefore, that the bases of a virtuous trajectory for Petrobras has been launched.

The truck drivers’ strike and its serious consequences for the life of the country triggered an intense and sometimes emotional debate about the origins of this crisis and placed Petrobras’ pricing policy under intense scrutiny. Few were able to see that the [policy] reflects shocks that have reached the global economy and its resulting effects on the country. Movements in oil and exchange rates have raised the prices of derivatives, magnified tax distortions in the sector and led the government to seek alternatives to the solution of the strike, defined by the subsidy concession to the diesel consumer.

I have reflected a lot on everything that happened. It is clear, Mr. President, that further discussions will be needed. And, in view of this situation, it is clear that my stay in the presidency of Petrobras is no longer positive and additive to the construction of the alternatives that the government is facing. I have always tried to demonstrate, in my career in public life, that, above all, my commitment is to the public good. I have no attachment to positions or positions and will not be a hindrance to these alternatives being discussed.

Therefore, by means of this letter, I present my request for resignation of the position of President of Petrobras, irrevocably and irreversibly. I make myself available to make the transition for the period necessary for the one who comes to replace me.

Parede resigned on Friday afternoon (May 1), with clear intentions of a “news dump” meant to blunt the immediate investor reaction to his departure. While investors have likely speculated that Parete was to resign, with the stock price already reflecting this overwhelming probability. However, I would expect the stock to continue to fall over the next week, as uncertainty around Petrobras’ independence and ability to weather future political shocks is in doubt, and the stock acts as a referendum on investors’ low opinion on Brazil’s immediate political future.

It has been interesting to see how generally nonplussed ordinary Brazilians are by the recent events’ impact on Petrobras’ value destruction and the company’s future prospects. In fact, it was even cited to me as a common strategy of layman Brazilian investors – pick up Petrobras stock during the latest scandal or lull in broader Brazilian sentiment, and then sell it once the econ / finance media / broader investor confidence returns! In ordinary Brazilian fashion, there always seems to be a bit of humor and levity amidst the fatalism and/or pessimism that can envelope the country, even with its national futebol / soccer.

Politically and socially, Parete’s resignation can be interpreted as a reflection of the populace’s broader feelings towards markets and foreign capital, as well as a further validation of the trucker’s demands and Temer’s continued unpopular tenure. The head of the Brazilian Senate lauded Parente’s departure on Twitter, citing his lack of “social sensitivity and political responsibility” as the principal reasons behind his departure. More broadly, the truckers continue to be perceived as the sympathetic party in their fight against Brazilian political cronyism and corruption, winning the narrative and the fight for public opinion with 87% of the population showing support for the truckers and their strike. It seems like any fight that pits the Brazilian political class against the populace in this current moment will prove ultimately destructive for the politicians, further underlining the fragility of Brazil’s current political state leading up to the October elections.

Brian Winter, who is the editor-in-chief for the Latin America-focused publication Americas Quarterly posted his reflections from his recent visit to Brazil during the truckers strike, concluding the that the current state of the country’s population is “frightened, leaderless, shockingly pessimistic.”

Winter provides an interesting perspective as someone who has witnessed Brazil’s rise and recent downturn with a broader Latin American and global, “outsiders” perspective. And his principal conclusion is one of disbelief: at the current fragility of of the Brazilian state and the increasing possibility that the “recovery” consensus cited by most macroeconomists and investors may be an illusion, or at least overly optimistic. That the sought-after “bottom” to the Brazilian economy following the exposure of billions of dollars of graft and corruption and expulsion of tens of political and business leaders, including its “native son,” former President Lula may not have been reached, with further volatility and unpredictable consequences yet to come.

At the top of these risks is an intervention by the Brazilian military, who have taken on an increasingly muscular and public stance amid public clamoring for an end to political corruption and a return to effective governing. Whereas discussion of a return to a military dictatorship was far from the public discourse just two years ago, Winter is shocked that it’s now become a common theme of conversation, even in its repudiation. As Winter cites in his article, recent scandals and exposed corruption has led to Brazilians having the lowest opinion of Democracy across Latin America, with just 13% of respondent “very satisfied” or “satisfied” with democracy in Brazil. Just 4 months ahead of the October elections, there is a clear disconnect between the scheduled elections and the pulse of the Brazilian population, who are increasingly clamoring for an upheaval beyond any ordinary election.

Interestingly, Winter sees this malaise as a further sign pointing to the election of the military commander Jair Bolsonaro. He writes that a traditional military coup or intervention as popularly conceived, with tanks rolling down Avenida Paulista, is unlikely in this current age of instant news / social media and international attention. However, Bolsonaro’s brash and irresponsible stance towards existing institutions, his violence-oriented approach for addressing Brazilian issues, and his broader campaign for election, could be a bellweather of broader support for the military and its commanders as responsible, effective, and trustworthy, despite its history of political silencing, persecution, and torture on its own population. Certainly, there is no other Presidential candidate to date who has managed to capture even a hint of this disconnect.

In the article, Winter recounted a conversation with a political analyst during his trip, who commented:  “I don’t think a majority of Brazilians want a coup. But if it did happen, the people would probably support it.”

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