Government-linked stocks suffer from measure that paves the way for political interference

12/15/2022

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Change enabled nomination of Aloizio Mercadante as CEO of the Brazilian Development Bank — Foto: Cristiano Mariz/Agência O Globo

A fast change in the State-owned Company Law, passed by the Chamber of Deputies on Tuesday night, worsened the market’s risk perception about potential interferences of the elected government in the companies in which it is a major shareholder and caused a strong correction in Petrobras and Banco do Brasil shares.

The common and preferred shares of the oil company dropped 9.8% and 7.93%, respectively, while those of the bank fell 2.48%, extending a downward movement that has been deepening since October 21, when they reached their peak in the year. Petrobras’s market capitalization fell 42.17% in the period, or R$219.6 billion, while Banco do Brasil’s retreated 30%, or R$39 billion.

The bill that changes the State-owned Law approved by the lower house, which will be voted on by the Senate on Thursday, reduced to 30 days from 36 months the mandatory waiting period for people appointed to executive roles in state-run companies who have been in party decision-making structures or participated in election campaigns. The change enabled the nomination of Aloizio Mercadante as CEO of the Brazilian Development Bank (BNDES). Yet, it was passed thanks to politicians from different parties, including supporters of President Jair Bolsonaro.

As a result, investors now fear that politically-appointed officials could take over other state-owned companies, heightening the fear of interference that had already been priced in since the outcome of the runoff vote was known, in October 30.

“We see an elected government showing a clear leftist bias as the market expected some pragmatism. And Congress, which should have blocked it, seems lenient. Such a fast change to the State-owned Company Law causes great concern, because it proves that it is easy to pass even worse measures. The possibility of [the Lula administration] naming politically-appointed officials to key positions in state-owned companies is a given, and this is likely to impact businesses,” an asset manager, who spoke on condition of anonymity, told Valor.

Along this line, Anand Kishore, an asset manager of Daycoval Asset, said he expects changes in the strategy of the companies, which will naturally impact the prices of stocks. Petrobras is one example. Considering public remarks by members of the elected government, he believes that the federal government will resume investments in assets that do not necessarily seek profitability, such as refineries, and that the government will soften the import parity price policy. He also believes that Banco do Brasil will be again a vehicle to stimulate consumer spending.

“Since the State-owned Company Law was created, in 2016, Petrobras has gone from a negative Return on Investment (ROI) to 40% in 2022, and paid good dividends. The improved governance has changed the company’s level. Banco do Brasil will undergo a minor strategic change, but it will also have an impact. That is, the shares will be forgotten by many investors until we have more clarity about how the government will act,” he said.

Goldman Sachs analysts Bruno Amorim, João Frizo, and Guilherme Costa Martins point out that the changes still depend on approval by the Senate, but that the large majority the measure achieved in the lower house shows that the new administration may have the political capital to pass more profound changes. In the short term, they added, Petrobras’s bylaws protect the company from interventions in its pricing and dividend policies. “But in the long term, visibility remains low because of uncertainties about how the new administration will run the company’s strategy.”

Goldman Sachs has a neutral recommendation for Petrobras, with a price target of R$34.6 for common shares and R$31.4 for preferred shares.

Despite the largely negative movement in state-owned stocks, Brazil’s benchmark stock index Ibovespa found room to erase an almost 2% drop built early in the trading session and end up 0.20%, at 103,745 points, a move seen by analysts as essentially technical. Besides the expiration of options, which helped the session to have the second-highest market turnover this year (R$ 81.34 billion), there may have been a rotation of state-owned companies shares to other stocks, with a large international investment bank leading the purchases. The improvement also occurred when future Finance Minister Fernando Haddad gave an interview stressing the importance of fiscal balance.

“The stock market is under strong pressure since the presidential election due to the deteriorating fiscal outlook. We still believe that pragmatism will prevail, and the new Finance minister, Fernando Haddad, will announce an orthodox fiscal framework soon. This will help to reduce the noise and bring a gradual recovery in the stock market. But risks remain,” said Pantheon Macroeconomics in a report. The research firm projects the Ibovespa at 128,000 points by the end of 2023.

(Felipe Laurence contributed to this story.)

*By Matheus Prado, Augusto Decker — São Paulo

Source: Valor International

https://valorinternational.globo.com/