An imminent programme of oil auctions will alleviate Brazil’s fiscal burden in the short term while a major pension reform will address long-term issues, the country’s economy minister has told GlobalMarkets.
Big oil companies are expected to scramble early next month for the first major auction for five years of pre-salt oil, ultra-deep water reserves, as investors are returning to Brazil thanks to a more friendly business-friendly environment.
“Everybody is coming to bid. It should be a huge auction,” Paulo Guedes told GlobalMarkets in an interview. “This will unlock the oil and gas frontier. Brazil will be the oil capital of the world investment for a certain time.”
Brazilian officials say that at least R4$100bn ($34bn) will go to the government and other federal entities. As a result, the government’s primary fiscal deficit is expected to be less than R$90bn for the first time in five years and well below its official target of R139bn.
Total state revenues have been estimated at around $150bn over 35 years. In addition, the government expects some $220bn in fiscal savings from the pension reform over 10 years. The key reform is now in the final stage of voting in Congress and the Senate is due to approve it next week.
Fiscal deficits have long been a key weakness of the Brazilian economy, and markets have been supportive of Guedes’ efforts. “Guedes’ message is very clear. There is a broad agreement on the economic policy direction. That is the underlying force,” said Martin Castellano, chief Latin America economist at the Institute of International Finance.
Guedes is also in favour of privatising Petrobras, the oil company that was at the centre of a vast corruption scandal in recent years, although he has yet to convince President Bolsonaro that Brazil should do so. “I keep saying what I have always said,” Guedes said.
“I would privatise all state companies, but the president and Congress may not want to privatise all of them. But as a rule, I do,” he said. “The president understands that, and he is giving us his support. How far will he go? It still remains to be seen.”
Many other reforms are in the pipeline prompting some market analysts to say the government may have opened too many fronts at the same time.
“There are many interesting initiatives in the pipeline. The market is curious to know what the next priority is. It seems very ambitious, but it would be rather difficult to approve all of them due to Brazil’s very fragmented political system,” said Mario Mesquita, chief economist at Itaú Unibanco, Brazil’s largest bank.