Brazil’s energy ministry disclosed that some of these measures include selling oil exploration licenses and reviewing the reference prices used to calculate oil taxes.
Brazil’s energy ministry has decided to turn to the oil industry to raise around $6.2 billion over the next two years to help the government meet its fiscal targets. Alexandre Silveira, Minister of Mines and Energy, put forth this proposal to President Luiz Inácio Lula da Silva on Monday.
The ministry disclosed that some of these measures include selling oil exploration licenses and reviewing the reference prices used to calculate oil taxes. If the government grants its approval, this new move will serve as an alternative to a potentially controversial increase in tax rates on certain financial transactions.
With the global economy in a phase of absolute uncertainty as a result of US President Donald Trump’s protectionist policies, Brazil, too, like all other countries, is facing the threat of an economic recession. With Trump unleashing his tornado of tariffs in April, Brazilian President de Silva announced that he had approved a law allowing executives to respond to the 10% tariffs Trump had levied on Brazil.
While the 90-day pause period seems to be a temporary truce, it has given businesses and markets some reprieve and made the global economy relatively more stable. However, these tariff risks still loom, and governments are preparing for more trade barriers at the end of these three months.
Economic concerns continue to shroud Latin America’s largest economy, with Finance Minister Fernando Haddad facing immense scrutiny for his inability to deliver the fiscal promises. Brazil has missed revenue expectations and has higher spending, causing this fiscal strain. Last week, as per the financial services company Moody’s Ratings’ assessment, Brazil’s rank in the credit outlook rating fell from positive to stable, underscoring expectations of larger fiscal deficits.
Moody’s also cited its grade revision to ‘a pronounced deterioration in debt affordability.’ Despite increasing investment and potential GDP growth, the ratings company concluded that these new challenges offset the progress achieved through favourable economic reforms, which are conducive to improving Brazil’s credit quality. The Finance Ministry issued a statement that efforts to improve fiscal results and to continue the process of structural reforms were underway.
When reference prices change, they erode the margins for oil companies and negatively impact investments. This could, in turn, fuel concerns about licensing delays and unfavourable exploration results. These measures run the risk of causing more problems in the medium and long term.
The Energy Ministry has urged ANP, the country’s oil regulator, to review the reference prices used to calculate taxes paid by oil producers, including that of the state-controlled Petrobras, by the end of next month. Bloomberg News reported that these oil and gas measures will include a bill mandating the country’s federal government to sell oil production rights in areas of the pre-salt, which are yet to be licensed.
This region, which includes areas near the giant Tupi, Mero and Atapu fields, comprises Brazil’s most abundant offshore oil region. If Silveira succeeds in getting these proposals approved by Congress, it could raise over 15 billion reais this year alone.
In the meantime, one of the largest state-owned oil companies, Petrobras, has expressed interest in local bond issuance, like debentures, to fund its long-term projects. The company aims to raise $526 million through these debentures for infrastructure projects to expand the supply of natural gas.
Financial analysts believe that as interest rates are high in the country, companies are unable to raise funds through the stock market and therefore turn to low-cost financial alternatives. Of these, infrastructure and incentivised debenture issuances are quite popular as they are exempt from taxes from both the issuing companies and investors, resulting in lower costs.
With the global economy on the precipice of a trade war, oil markets are more volatile than ever. Brazil is taking the necessary measures to minimise the damage to its domestic economy through these new measures, it is evident that the country is also dealing with the existing problems which are already plaguing it.
