It's been a tough couple of years for Brazil's "national champions." Implicated in a far-reaching corruption probe in 2014 that centered on Petroleo Brasileiro (Petrobras), the giants of Brazilian industry faced the full force of the law over illicit activities at home and abroad. But fast-forward to 2018, and the country's champions appear to be back on their feet. Brazil's economy exited a recession last year, and the country is likely to grow by even more this year. And now with major companies signing leniency deals with Brasilia and restructuring their businesses, large corporations may soon regain some of the clout they enjoyed beyond the country's borders.
Giant Strides Beyond Brazil
The companies at the center of the corruption probe hail from a number of sectors, yet they all enjoyed easy access to inexpensive credit from the state-owned Brazilian Development Bank (BNDES) that enabled them to expand their operations abroad. Brazilian firms such as engineering company Odebrecht, meat processing company JBS, mining company Vale and aircraft manufacturer Embraer obtained credit from BNDES to purchase assets and win contracts abroad. Thanks to the bank's loans, large Brazilian conglomerates won contracts at home, as well as in other Latin American countries and even in Africa.
Successive Brazilian administrations have used BNDES not only as a financier of development projects in Brazil but also as a foreign policy tool. In the past, it has provided loans to foreign countries to pursue infrastructure projects — on the condition that Brazilian companies received the contract to conduct the work. Less than a decade ago, such companies as Odebrecht succeeded in securing the rights to infrastructure projects in Venezuela that were worth about $30 billion thanks to BNDES' largesse. BNDES also provided funds that helped Brazilian companies enter major economies as well. Brazil's JBS, for example, became the world's largest meat processing company in 2009 after it purchased a majority stake in U.S. poultry giant Pilgrim's Pride with BNDES financing.
A Fall From Grace
BNDES' assistance to a few massive countries spawned the emergence of Brazilian multinational corporations, but the flip side of the companies' spectacular growth proved ruinous. In 2014, Brazilian authorities began to unravel a corruption scheme, alleging that many of the bank's beneficiaries illegally financed and bribed hundreds of politicians, as well as Petrobras executives, to win contracts. The corruption, however, did not stop at Brazil's borders; it ensnared politicians across Latin America. Some of them, such as Peruvian President Pedro Pablo Kuczynski, have faced impeachment as a result of alleged illegal dealings with Brazilian firms. The effects of the corruption probe were compounded by a downturn in the economy, while a drop in the price of such commodities as oil and iron ore harmed big Brazilian companies, such as Petrobras, which rely on oil revenues.
Because of its pre-eminent position, Petrobras invariably has a ripple effect on Brazil's largest engineering companies whenever it experiences problems. In the last decade, the company started work on several large projects in the country, ranging from the construction of shipyards to refineries, and largely hired Brazilian engineering companies to conduct the projects. Accordingly, the cancellation of several large projects worth billions of dollars due to the corruption scandal put the financial health of many Brazilian engineering companies at risk.
The role of BNDES as the financial guarantor of large projects has diminished greatly since 2015 due to a political crisis that resulted in the impeachment of President Dilma Rousseff, as well as a two-year recession that caused Brazil's gross domestic product to plunge by over 7 percent. After Brazilian courts convicted the CEOs and executives of the country's largest companies on bribery charges, officials prohibited many such firms from signing government contracts. Authorities also barred state-owned banks such as BNDES from lending money to many companies embroiled in the scandal after 2014 — regardless of the merits of any deal. The effects of the probe are evident from BNDES' annual loan figures: The bank lent over $96 billion in 2011 (the World Bank, by contrast, lent just $30 billion globally that year) but doled out just over $20 billion in 2016.
On the Road to Recovery
The Brazilian economy, however, is now back in the black amid the prospects of a greater economic recovery this year. The country's GDP grew by 1 percent last year, but it is forecast to rise by about 3 percent this year. Additionally, many of Brazil's largest engineering companies, such as Odebrecht and Camargo Correa, have signed leniency deals with authorities in which they agree to pay fines, enact management changes and engage in other restructuring to ensure that such corruption never occurs again. The deals, accordingly, have opened the way for the firms to sign new contracts with the government and state-owned companies, as well as to gain easier access to credit. As part of the deals with the government, Odebrecht has paid in excess of $2.6 billion in fines for bribery in Brazil and several Latin American countries. And in a further effort to put the scandal behind it, Odebrecht has announced that its oil and natural gas arm will change its name from Odebrecht Oil and Gas to Ocyan as part of a rebranding effort.
BNDES President Paulo Rabello de Castro also confirmed last month that the bank will lend almost 30 percent more this year over 2017. While a far cry from the halcyon days of 2011, the lender is expected to offer $30 billion in credit this year — suggesting that the bank has now emerged from the worst of the crisis. Still, BNDES will seek to maintain a more balanced portfolio by providing more loans to small and medium-sized companies, according to Rabello de Castro. Nevertheless, it is doubtful that BNDES will abandon its policy of funding large infrastructure projects abroad as a means of making Brazilian companies more competitive internationally.
In fact, during a meeting last month between Angolan President Joao Lourenco and his Brazilian counterpart, Michel Temer, Brazil agreed to resume loans to finance large hydroelectric and water projects in Angola, while BNDES also approved a $2 billion credit line to Luanda on Feb. 12. Elsewhere, Zimbabwe confirmed earlier this month that it had obtained approval for a $98 million loan from Brazil to purchase agricultural equipment from Brazilian companies. Additionally, Brasilia's ambassador to Harare, Ana Maria Pinto Morales, confirmed in November 2017 that Brazilian companies are eager to help construct the 2,500-megawatt Batoka Gorge hydroelectric project, which is between Zimbabwe and Zambia. Because the dam's price tag is expected to total about $4 billion, backing from BNDES is likely to be a prerequisite for any Brazilian firm wishing to participate in the project.
Petrobas on the Prowl
Petrobras, too, is expected to soon resume the purchase of assets abroad. The company's CEO, Pedro Parente, announced last month that Petrobras would commence a search for new natural gas opportunities abroad. The Brazilian giant has struggled over the past four years under the weight of a high corporate debt — one of the world’s largest — due to the government's fuel price control policy and low oil prices. However, the company has succeeded in reducing its total debt by about 30 percent in the past couple of years by divesting itself of assets and by benefiting from a government decision to lift fuel price controls.
The energy company is likely to search far and wide for overseas assets and could seek deep-water natural gas opportunities in places such as West Africa, East Africa, Southeast Asia and Guyana. Ultimately, the company is seeking natural gas assets abroad because regulators forced Petrobras to abandon its domestic monopoly on natural gas, leaving it largely dependent domestically on its remaining downstream (oil refining and natural gas processing) and pre-salt upstream (exploration and production) assets. Accordingly, Petrobras must continue to diversify its upstream portfolio through such steps as the purchase of foreign natural gas assets.
It will take years, if not decades, for major Brazilian companies to regain the international stature they enjoyed just half a decade ago.
It will take years, if not decades, for major Brazilian companies to regain the international stature they enjoyed just half a decade ago. After all, the Petrobras corruption probe forced many of these firms to sell their assets and undergo major operational restructuring. There are early signs, however, of a comeback by Brazil's major companies. As Brazil's economy enters a new cycle of economic recovery, BNDES will gradually resume its role of writing the checks that underpin the expansion of Brazilian companies abroad. And where Brazilian companies go so does Brasilia. With firms again turning their attention beyond the country's borders, the stage is set for Brazil to regain — at least partially — the influence it lost in the past four years throughout Latin America and Africa.