Author Archives: Cecilia Rutkoski Hoff

About Cecilia Rutkoski Hoff

Pesquisadora em Economia da FEE. Economics Researcher at the FEE.

Petrobras still matters for the Brazilian economy

Brazil’s largest company and one of the world’s oil giants, Petrobras has shifted in recent years, from a guarantor of the country’s future into an outstanding representative of the set of frustrated expectations that accompanied the end of the economic growth cycle achieved between 2004 and 2010. The discovery of huge oil reserves in the pre-salt layer, in a background of rising oil prices at the international level, has brought the prospect of a thriving future, in which energy autonomy would prevail along with surplus in the balance of payments, industrial and technological development and reducing regional inequalities. Thus, as a company partially owned by the state, Petrobras would assume a leading role in national development. Today, the “pendulum” has swung the other way, and expectations are more modest and sometimes even pessimistic. The euphoria of the 2000s led to the implementation of projects that, in light of the current scenario, have proven to be unrealistic regarding timing, costs and long-term assumptions. This fact, along with plummeting oil prices, the adoption of a controversial pricing policy and the revelation of corruption scandals, has weakened the financial position of Petrobras, and helps to form an underrated perception of its importance for the country. Despite the crisis, Petrobras still matters, in both economic and strategic terms for the development of Brazil.

The investment carried out by Petrobras is an important part of national investment. It currently corresponds to more than 50% of the gross fixed capital formation (GFCF) of the Central Government and state companies, which has increased from 2008, not due to the reduction of other investments of the government, but to the growth of both figures as a proportion of the Gross Domestic Product (Figure 1). On average, between 2008 and 2014, investments of Petrobras represented 7.2% of the total Brazilian GFCF, compared to 4.5% between 2002 and 2007 (Figure 2). Excluding residential construction, which accounts for approximately 20% of the gross fixed capital formation in Brazil, oil-driven investment now represents about 9.0% of the total national investment in the construction of buildings and non-residential structures, machinery and equipment, and intellectual property products.

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The growth of investments in oil and gas exploration can be seen in the dynamism of some indicators, including the production of the extractive industry. In Figure 3, whose data were based on December 2002, we notice that in the period until June 2016, the physical production of the extractive industry accumulated a growth of about 50.0%, while the manufacturing industry expanded less than 10.0%. It is true that part of this growth can be attributed to the increase in iron ore extraction, which was also favored by rising prices seen until mid-2012. This assertion does not lessen, however, the relevance of the oil and gas extraction activity for the performance of the sector, which accounts for the largest share of the extractive industry (65.0% against 30.0% of iron ore).

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From the mid-90s, the domestic output of oil and gas has started an accelerating growth trend (Figure 4). Currently, oil production is at 2.5 million barrels per day, representing an increase of 98.0% since the early 2000s, while natural gas is at 600 thousand barrels per day, an increment of 165% in the same period. At the same time, the share of oil processed in domestic refineries increased from 80.0% in 2010 to 88.0% in 2016. Since the early 2000s, the volume of oil processed in domestic refineries has significantly increased about 20.0%, though not proportional to the increase in production. Finally, the expansion of oil and gas yield has favored the Brazilian external accounts, though not exclusively, since both the recession and the reduction of prices in the international market have also contributed to the expansion of trade surplus. Reflecting the interaction of these three facts, trade deficit of fuel was reduced from US$14.6 billion in 2014 to US$5.4 billion in 2015 and to US$0.9 billion in the first four months of 2016.

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Although still resting on a solid production base, Petrobras is currently facing evident difficulties, especially regarding its financial health. New and relatively modest prospects for the evolution of global demand have led to a rescheduling of the plan of production expansion and to the adoption of more realistic premises for the future behavior of variables such as the exchange rate and prices. In the Business Plan of June 2015, released still during the presidency of Ademir Bendine, it was estimated that oil production should reach 2.8 million barrels per day by 2020, a significant reduction from the forecast in the previous plan of 4.2 million barrels per day. This is not, however, an exclusivity of Petrobras. There has been a broad trend of moderation in the pace of production growth. In the new plan, the forecast for world production growth was 1 million barrels per day by year 2020, while in the previous plan it was 1.6 million barrels per day for the same period.

The combination of a scenario involving the assumption of more moderate prospects for production and prices with the excesses of the recent past and, above all, the high amount of investment necessary to explore the pre-salt has increased the leverage of the company and its financing costs. This fragility has induced the development of a plan of asset selling and the review of investments in order to reduce debt and focus efforts and resources on the exploration of the pre-salt. With regard to divestments, in the January 2016 revision of the Business Plan, Petrobras expected to dispose of assets amounting to US$15.1 billion between 2015 and 2016 (reaching only US$0.7 billion in 2015) and US$42.6 billion between 2017 and 2018. Such a measure would help to reduce the company’s net debt, which exceeds US$100.0 billion. It was estimated that investments would amount to US$98.4 billion between 2015 and 2019 (a cut of US$32 billion compared to the previous plan), focusing on production and exploration activities. Applying the current exchange rate of about R$3.3/US$, this amount would be equivalent to an annual average investment of R$80.0 billion, slightly higher than the average of 2011-15 (R$72.0 billion).

Thus, the share of Petrobras in the domestic investment may continue to decline, while the proportion of exploration and production activities in terms of its composition may increase, to the detriment of others, such as the refining capacity, which had been growing in recent years. With the new presidency of the company, further adjustments are expected. However, the expectation is to maintain the general stance of leverage reduction, investment focus on the pre-salt and moderation in projections. Despite the reduction of oil prices in the international market, which seems to be structural, there are indications that the current level is still sufficient to enable the exploration of the pre-salt. In the event of a new round of falling prices, this strategy would also be at stake.

The new scenario for oil prices, besides the induction of a strategic review in investments, also calls into question the pricing policy that has been traditionally conducted by Petrobras. The policy consists of preventing the immediate transfer of external oscillations to the domestic market, with the intention to reduce volatility and indexation of national prices. In this strategy, the transfers occur only when the changes in the level of international oil prices prove to be lasting. This definition includes, in any case, some degree of subjectivity. In 2012-14, due to the persistence of a high level of prices in the international market, the containment of transfers appears to have been extended for too long (Figure 5). Furthermore, in 2015-16, the policy that keeps fuel prices high in the domestic market, even in light of lower prices in the international market, seems to complement the strategy of financial relief — even if not explicitly — by compensating losses from the previous pricing policy, which are almost zeroed, and expanding funds in the short term.

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Petrobras’ twofold character, at the same time a public and a state-owned company, imposes the challenge of balance and reconciliation of market and state strategies. The reconsideration of the operating model of the pre-salt exploration system, which discharges the company from the commitment to operate in all fields of these reserves and, at the same time, preserves its preference for those considered strategic, can meet these requirements, provided that, and this is important, the prerogative is actually exercised. Inflated by the favorable situation, the profit of some projects seems, in fact, to have been overestimated. In this context, having to lead the development of all fields could end up burdening the company and reducing the growth rate of investment. A similar occurrence can be observed in the national content policy. Even in the case of an instrument that is widely used by oil producing countries to stimulate industrialization and technological catching up, the national content policy raises the possibility of loss of competitiveness in a scenario of narrower profit margins.

However, if adherence to ambitious projects implies, in the current situation, non-negligible risks, the complete relinquishment of the use of oil as a strategic resource also does not pose as a solution. As a state company, Petrobras still plays the role of stimulating projects that, in a background adjusted for lower prices, meet the interests of the country. This task transcends continued leadership in the exploration of the most robust resources. It also involves the allocation of knowledge and capital accumulated by the company to fulfill broader interests, including the fostering of renewable energy production, the generation of innovation and the narrowing of regional inequalities.

Editorial

The apparent insulation of Brazil from the recent emergence of mega-trade agreements and the adoption of measures in recent years to foster the industrial and technological deepening — as provided in Inovarauto[1]  and the changes in the pre-salt oil exploration regime — have reignited the old debate on the advantages and disadvantages of protection. According to the conventional economic theory, trade liberalization tends to induce global society to a division of labor more conducive to the expansion of gains in productivity and income in the long term by contributing to the enhancement of the comparative advantages derived from the natural resource allocation among countries, despite possible sectoral losses in the short term. Alternative approaches, on the other hand, provide a number of arguments justifying intervention, such as infant industry protection — under the assumption that comparative advantages can be “created” through deliberate processes of industrialization —, income distribution, national security, food security, in addition to several problems that can result from the specialization of a country in the production of commodities.

Even if recognizing the need for the regulation of international trade by national governments, for the reasons described above and others, such as dumping and unfair trade, economic theory also points out the risk that any allocative distortions, resulted from government intervention in the functioning of markets, generate excessive costs to society. The conventional discourse points out the risk that the “government failures” will eventually become greater than the “market failures” that we seek to correct. In his article, Thomas Kang presents the recent academic debate about the costs and the benefits of trade protection, taking into account that in economic policy the discussion often assumes dogmatic proportions and seems to have no end. For Kang, the central issue apparently is not whether or not to protect, but “how and how much to protect.”

The World Trade Organization (WTO) was created in order to supervise and coordinate the adoption of international trade liberalization measures. Since 1995, the Organization has replaced the General Agreement on Tariffs and Trade (GATT), which emerged from a set of international institutions created in post-war times, from the Bretton Woods Agreements. The GATT intended to stimulate free trade multilaterally, arbitrating differences among countries in their liberalization processes, in order to avoid repeating the protectionist escalation observed in the interwar period. Such task, now performed by the WTO, has been complex, as it involves a number of disparities between countries, which have become even more evident after the subprime crisis in the U.S. Not surprisingly, therefore, the rounds of multilateral negotiations led by the WTO have advanced with difficulties. The Doha Round, launched in 2001 and without prospects for a conclusion, highlights this phenomenon.

In parallel with the negotiations through the WTO, regional trade agreements known as Preferential Trade Agreements (PTAs) have gained increasing importance. From this process, two mega trade agreements have recently emerged: the Trans-Pacific Partnership (TPP), involving 12 countries in Asia and the Americas, and the Transatlantic Trade and Investment Partnership (TTIP), involving the U.S. and the European Union. Such agreements transcend the tariff reduction process, covering broader issues, such as non-tariff barriers, the creation of supranational mechanisms for dispute settlement, intellectual property rights, labor standards, currency manipulation, government procurement, the environment, etc. In other words, those mega agreements establish a new regulatory framework for international trade. In his article, Robson Valdez addresses the PTAs in a historical perspective, highlighting the wave of regionalism that began with the European Community and the North American Free Trade Agreement (NAFTA) and reached its climax, in recent years, with the TTIP and the TPP.

For the good or the bad, the PTAs, and especially the last two mega deals, have put in check the international integration strategy of the Brazilian economy. The Brazilian foreign policy has always favored the multilateral negotiations in the WTO. So far, this strategy has been justified by the understanding that negotiating in bloc allows greater bargaining power for developing countries, which are relatively closed and have large and coveted domestic markets, such as Brazil and India. However, multilateral negotiations have been exhausted by the developed countries, in favor of the mega agreements. In her article, Beky Moron de Macadar explores the challenges that these mega agreements represent for the Brazilian foreign policy. In practice, the country is likely to face higher tariffs than its competitors in the markets of the U.S. and the European Union, at the same time that it may witness the undermining of its trade preferences with South and Central America. On the other hand, the possible accession of Brazil as a member would take place with “the scarce space to negotiate [its] interests”. For Macadar, despite the challenges, which are not few, the mega agreements are an opportunity for Brazil to review its strategy and to adopt measures that may contribute to increase productivity.

Still on the challenges that mega agreements inflict on Brazil, in his text, Tomás Amaral Torezani seeks to evaluate their potential effects on the sectors of the Brazilian economy in terms of both trade diversion and the possibility of the erosion of the preferential access obtained in previous negotiations. For Torezani, commodity trade diversion may occur from Brazil to Asia in favor of competitors such as the U.S., Canada, Australia and New Zealand. Also, there can be diversions in the Brazilian markets of goods manufactured in the U.S. and in South America. In terms of economic growth, the effects may not be significant, given that Brazil is still a relatively closed country. However, such moves can reinforce the Brazilian deindustrialization process, affecting, in particular, the automotive industry. For the author, the emergence of mega agreements and the nonparticipation of Brazil tend to reinforce both the fact that Brazil is a commodity exporter and its ties with China, both taken as outsiders.

The current issue’s interviewee is Prof. Jorge Arbache, from the University of Brasilia (UnB). The interview tackles not only the challenges that mega agreements represent for Brazil, but also some broader issues behind those agreements, especially the increasing integration of services markets, which has been his latest research area.

Enjoy your reading!

 

[1] A Brazilian federal program created in 2012 to promote the production chains of the auto industry.

Economic links between Mercosur and the State of Rio Grande do Sul

The location of Rio Grande do Sul in Southern Brazil, regarded as “eccentric” by many, due to its distance from the country’s main consuming centers, becomes central when it comes to Mercosur. After all, the shared borders with Uruguay and Argentina give the state a privileged position for strengthening production and trade ties between the bloc’s countries and Brazil. Initially perceived as a threat to the state’s economy, given the productive similarities with the neighboring countries (mainly because of the relevance of agribusiness), Mercosur has become a factor for attracting investments to Rio Grande do Sul. In that crop of investment, achievements can be seen in the automotive industry, which has witnessed the creation of a regional division of labor involving complementarities and interdependences between the products manufactured in Brazil and those made in Argentina. The same can be said of the agricultural machinery sector, whose location in the state has proven strategic for meeting the needs of both the neighboring countries and the growing demand of the Brazilian midwest. From the start, Mercosur posed a strategic opportunity for a structural transformation in the state’s production structure.

[…] the integration with the countries in the southern part of the continent has proven to be able to change the major features of the state’s economy. Indeed, the state is starting to leave behind its historical peripheral condition in Brazil to play a central role within the integrated economy. Investment decisions which reflect and materialize such ongoing change are starting to be made and tailored to meet the needs of Mercosur.[1]

After more than 25 years since its creation, Mercosur still plays a strategic role in the state’s economy, although the opportunities and expectations about the bloc’s future are less promising.

The state’s economy is more open to Mercosur than the national average due to the built production complementarities and the higher share of imports, whose front door is the state and whose destination is often the center region of Brazil (Figure 1). On average, between 1991 and 2014, sales to Mercosur accounted for 14% of Rio Grande do Sul’s exports and 11.2% of the ones from Brazil. As regards imports, in the same period, Mercosur was responsible for 32.5% of the state’s foreign purchases and 9.8% of Brazil’s .

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When comparing the state’s exports towards Mercosur with those towards other regions, the relevance of the bloc becomes even more evident (Figure 2). Throughout almost the entire period between 1991 and 2014, Mercosur was the third main destination of the state’s exports. The average share of the export value was only surpassed by the European Union (22.8%) and the U.S. (19.9%). However, their relevance in the exports of Rio Grande do Sul has been reducing significantly in recent years.

Considering each bloc member, for the period 1991-2014, on average 62% of the exports were directed to Argentina, 19% to Paraguay and 18% to Uruguay. From 1991 to 2009, the exports of Rio Grande do Sul to Mercosur increased in value at an average annual rate of 15%, while the overall state’s exports expanded in 9%. More recently, however, a sensible change can be noticed: the state’s sales to the bloc member countries shrank 2% between 2010 and 2014, while the state’s total exports grew 4%. This change reflects primarily a decrease of 9% in the sales to Argentina in the period.

The relevance of Mercosur for the state’s economy, at least when it comes to international trade, becomes even clearer when the composition of the exports to the bloc is disaggregated. By analyzing the state’s exports in a more recent period (2007-14) and by aggregate factor, we can notice that the composition of the export basket of Rio Grande do Sul to the world (Figure 3) is predominantly commodity-driven (average of 52%), while the sales to Mercosur (Figure 4) largely comprise  manufactured products (92%), which shows a very contrasting pattern.

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A similar pattern can be seen when we classify the state’s exports by technological intensity. Medium-high and medium-low technology goods comprise a larger share of the exports to Mercosur, while the exports to other destinations have a greater share of nonindustrial and low-technology items. In 2014, medium-high and medium-low technology goods made up approximately 80% of the sales to Argentina and Uruguay. On the other hand, over 70% of the exports to European countries consisted of low-tech or non-industrial products, a percentage that exceeded 90% in the case of the exports to China. To the United States, the share of medium-high and medium-low technology products was 42% in the same year. However, the U.S. participation in the state’s exports has been consistently decreasing, as can be seen in Figure 2.

Therefore, Rio Grande do Sul’s exports to the Mercosur nations comprise mainly industrial products with some degree of technological intensity. The importance of such products is also revealed in the greater income-elasticity of the demand and in the high potential of long-term growth. These products also tend to be less subject to the deterioration of the terms of trade, less susceptible to substitutes in the world market and more demanded by more dynamic markets. In this case, Mercosur can be seen as an exception to the structure of the export basket of Rio Grande do Sul, which is highly concentrated in low value-added products. Thus, the proximity of the state’s economy to that of the Mercosur member countries — and the very existence of the bloc — contributes to the diversification and the quality of the state’s exports, offsetting the competitive difficulties associated with the export of manufactured goods to other regions.

As for the sectorial activity in the state’s exports to Mercosur (Table 1), a strong participation of chemicals, machinery and equipment and motor vehicles can be underlined. Mercosur is also a major destination for the products of other industries with lower participation in the state’s exports, such as petroleum products, textiles, metal products, rubber and plastic products, computer equipment and electronics. The exceptions — some of the important state’s exports of which Mercosur does not represent a relevant share — are food products, tobacco products, leather and footwear. Regarding the share of exports in the total production, the chemical and textile sectors direct much of their production to Mercosur. In the other sectors, Brazilian market and exports to other countries and blocs are more relevant.

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As can be perceived from the discussion above, the last few years have been characterized by difficulties in the trade and production relations within the bloc, to which the economic problems faced by Argentina have greatly contributed. These difficulties do not stem only from the slowdown in the growth rates and from the high inflation in that country, which inevitably impact on its imports. They especially reflect the scarcity of foreign exchange in the face of the still poor access to external financing flows, a legacy from the crisis of the end of the convertibility plan in the early 2000s. More recently, the shortage of foreign exchange in Argentina has worsened, owing to the cooling of soybean prices in the world market. In that scenario, the crisis in the neighboring country has affected the performance of Rio Grande do Sul’s exports not only because of the drop in imports, but also because it has induced, even temporarily, the adoption of control policies over the granting of import licenses and the establishment of quotas.

Furthermore, the Government of Argentina has also been adopting structural measures aimed at overcoming the shortage of foreign exchange in the long run. They involve reissuing an import substitution policy — already evident in the agricultural machinery sector, given the “[…] change of the neighboring country from the main foreign customer into a competitor in South American and African markets”[2] — and broadening partnerships with China, in order to finance infrastructure projects in exchange for a greater opening for the manufacturing market of that Asian country. As a result, there is an increasing market share of Chinese manufactured goods imported by Argentina and a greater propensity for Brazil to adhere to bilateral trade agreements, which questions many economic advances achieved thanks to the bloc. Considering that an important part of the industry established in Rio Grande do Sul aims to occupy a strategic and central position simultaneously for Brazil and the Mercosur markets, the difficulties of the bloc also result in the loss of crucial competitive advantages for attracting investments to the state.

[1]  CASTRO, A. B. Notas para uma estratégia. In: RIO GRANDE DO SUL. Secretaria de Coordenação e Planejamento (SEPLAG). Projeto RS 2010: realizando o futuro. Porto Alegre, 1998. p. 10.  Translation mine.

[2]  FEIX, R.; DE GASPERI, E. Argentina substitui importações de máquinas agrícolas. Carta de Conjuntura FEE, Porto Alegre, v. 23, n.  12, p. 1, dez. 2014. Translation mine.