8/8/2019 Brazil Petrobras Operation to Cover Up Hole in Govt Budget | iMarketNews

1/2

Wednesday, September 29, 2010 - 12:35

Brazil Petrobras Operation to Cover Up Hole in Govt Budget

By Daniel Horch

SAO PAULO (MNI) - Brazil's government is planning to use an accounting trick, based on the recent Petrobras share sale, to make its budget numbers

look better temporarily, analysts told Market News International Wednesday.

The move, long rumored, was essentially confirmed by Treasury Secretary Arno Augustin Tuesday, when he told journalists that September, the month

that includes the Petrobras operation, would give the federal government the "largest surplus in history."

President Lula has called the Petrobras capitalization plan, worth $69 billion, "the biggest equity offer in the history of capitalism."

But of that $69 billion, $43.5 billion came from Petrobras itself, to pay the government for 5 billion barrels of undeveloped ultradeepwater petroleum

reserves, and that in turn was paid for using a government loan.

Felipe Salto, a specialist in public accounts at the Sao Paulo consultancy Tendencias, told MNI the government loan to Petrobras was "an ingenious

piece of financial engineering."

In sum, for $43.5 billion of the $69 billion capitalization, no money changed hands, as the company essentially gave the government shares in return

for the petroleum reserves.

However, R$24.7 billion ($14.4 billion) of the government's loan to Petrobras came via the state BNDES development bank. The government is lending

$14.4 billion to the BNDES, which it is lending it to Petrobras, to pay the government. But government accountants are booking this $14.4 billion as

revenue.

With this revenue, the government will be able to officially "meet" its 2010 budget target of a primary account surplus of 3.3% of GDP.

"This is clearly an accounting trick," Roberto Padovani, chief economist for WestLB in Brazil, told MNI Wednesday. "The primary account balance no

longer has any meaning."

Salto said the Petrobras operation was structured this way precisely in order to permit this accounting trick.

"It would have been simpler for the company to just give the government the shares to pay for the reserves," he said.

Salto estimates that once this and other "accounting tricks" are discounted, the government will achieve a primary surplus of only 2.6% of GDP.

Over the last 12 months, the consolidated public sector has had a primary surplus of only 2.01%, and a nominal (cash flow) deficit of 3.38% of GDP,

according to Central Bank data released Wednesday.

"These are not terrible figures," Salto said. "GDP growth of over 7% makes up for a lot."

But he expects nominal deficits to average more than 3% during the coming four years.

This also is probably sustainable, Salto said, as he expects GDP growth to average 4.4% during that period, but it should be seen as a "warning sign."

With current account deficits also expected to exceed 3% of GDP, Brazil is increasingly dependent on international capital flows, and another

international crisis or a change in investor sentiment could cause a "sudden adjustment," he said.

"If the next government does not change course, and we do not expect it to, in the medium term, the risk of a crisis will grow."

WestLB's Padovani said this medium term is probably about two years.

"Right now, there is a lot of complacency in the markets surrounding Brazil, but once the rest of the world comes out of recession and there is more

competition for capital flows, market agents will start paying attention to Brazil's fiscal problems," he told MNI.

"Brazil is building a risky scenario. Sooner or later things will explode," Padovani warned.

Of course, the government could take advantage of current strong growth to impose fiscal austerity relatively painlessly, but Padovani also doubts this

will happen.

"Dilma (Rousseff) has a very state-oriented mind, and the markets are so complacent, she has no incentive to change," he said, referring to the leading

candidate, and Lula's preferred successor.

Presidential elections will take place Sunday, and though the latest polls indicate it is no longer a sure thing Dilma will win outright, avoiding a secondround vote, she would still be the overwhelming favorite if a runoff vote between the two leading vote-getters is held October 31.

** Market News International **

Marketnews.com Contact Us Archive About Us Authors Advertise Glossary FAQ

Brazil Petrobras Operation to Cover Up Hole in Govt Budget | ... http://imarketnews.com/?q=node/1

of 2 10/3/10 7:56

8/8/2019 Brazil Petrobras Operation to Cover Up Hole in Govt Budget | iMarketNews

2/2

New Grants Available

Find Hundreds of Applications Fast Apply

Today. Deadlines Approaching.

Obama's War on Your Money

3 Steps You Must Take Now to Shield Your

Wealth from His Unholy War

Brazil Petrobras Operation to Cover Up Hole in Govt Budget | ... http://imarketnews.com/?q=node/1

of 2 10/3/10 7:56