Political Risk Analysis of Brazil

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Political Risk Analysis of Oil Sector in Brazil

Presenters Name Partha Tripathi, Subodh Pandey, Bipin Chandra, Shantanu Sen, Bibhu Mahapatra, Avik Sinha

March 2012


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Table of contents

Economic Factor

Political Factor

Societal Factor

Major Historical de-stabilizing Incidents

Rating by external agencies

Assessment

Political Risk Analysis Report- Brazil-Oil Sector


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Economic Factors

GDP Growth per capita growing at 6.6% However Brazil economy is expected to grow at 3%

in 2011 as compared to record growth of 7.5% in 2010.

Inflation rate rose to 6.64% in November 2011 though down from 6.9% in October 2011.This is higher than the official target level of 4.5% 2.0%

Industry sector contracted by 0.9% with manufacturing falling by 1.4%, services falling by0.3%, and agricultural growing at 3.2%.

China is largest Trading partner, The stock market is dominated by Petrobras and vale ishighly sensitive to developments in Chinese Economy.

USD/BRL rose by 3.26% Brazil has adopted Free floating currency regime in 1999. BrazilianCurrency has fallen to 1.8634 in Dec 2011 since a record high of 1.53 against USD.

Brazilian Real is still considered as overvalued currency. High Interest attracts Foreign Flowcombined with subdued demand of Brazilian goods from Europe, causes the BRL toappreciate making the exports more uncompetitive. However Government is targeting tokeep BRL/USD with 1.7-1.9.

Unemployment rate remain on higher side 5.8%

Political Risk Analysis Report- Brazil-Oil Sector-Economic Factors

Source: World bank data, Brazilian government report


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Economic Factors-Ranking in Doing Business Report

Starting a Business : 120 Increase in Rank by 5

No of Procedures: 13 Time taken: 119 days Cost (% of Per Capita) : 5.4%

Getting Credit: 98 Decrease in Rank by 2 Strength of Legal Rights Index(0-10) : 3, higher score means Better Depth of Credit Information: 5

Public Registry coverage (% of Adults) : 36.1 Private Registry coverage (% of Adults) : 61.5

Protecting investors : 79 Decrease in Rank 4 points Extent of disclosure(0-10): 6 Extent of Director Liability index(0-10): 7

Ease of shareholders suit Index(0-10): 3 Strength of Investor protection Index(0-10): 5.3

Enforcing Contracts : 118 no change in Ranking Time (Days) : 731 Cost(% of Per Capita): 16.5% Procedures: 45

Political Risk Analysis Report-Brazil-Oil Sector-Economic Factors

Source: World bank Doing Business Report year 2012


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Table of contents

Economic Factor

Political Factor

Societal Factor



Assessment



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Political Factor

Brazils labour minister resigns early December amid accusations of corruption. A total of seven ministers

resigned from the cabinet during 2011. President Rousseffs tough stance on corruption brings her record approval ratings.

The large number of political parties present in the Congress makes troublesome coalitions a naturalfeature of Brazilian politics. Tension between the ruling Workers Party and its main coalition partnerPMDB threaten to halt several of the presidents proposed reforms.

A proposed reform of Brazils oil laws would alter the distribution of oil royalties in favor of non-producing

states. The state of Rio de Janeiro is vehemently opposed to the bill, claiming it would disrupt thepreparations for the 2014 FIFA World Cup and 2016 Olympics.

The first auction of pre-salt oil blocks awaits the approval of the oil reform.

Brazils environmental agency fines Chevron 60 million BRL, $32 million, over a leak from the Frade oilfield in early November. Federal prosecutors announce a 20 billion BRL, $10.5 billion, lawsuit whileseeking to suspend the operations of both Chevron and rig operator Transocean.

The 11th-round oil auction is expected to occur in Q2 2012, after bureaucratic hold-ups causing delays.The round will feature blocks along Brazils equatorial margin.

The first auction of pre-salt blocks will introduce a production sharing system to replace the currentconcession system. Under the new framework, Petrobras will be the only qualified operator of oil fieldsdeemed strategic by the government.

Political Risk Analysis Report-Brazil-Oil Sector-Political Factors


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Table of contents

Economic Factor

Political Factor

Societal Factor



Assessment



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Societal Factors

Urbanization

Urbanisation :87% of total population Rate of Urbanisation: 1.1% annual rate of change

Race and Ethnic tension It has predominantly white 53.7%, Mulatto (Mixed Black and white) 38.5% There is high incidence of mixed race marriages thus causing less racial/ ethnic tension

Religious fundamentalism

Roman Catholic 73.6%, Protestant 15.4% Constitution provides Religious freedom and Constitution is secular There is no religious fundamentalism incidents in last 20 years

Corruption Corruption perception index by Transparency International is 3.8 Companies operating in Brazil have to deal with a wide range of regulatory agencies due to the

federal structure of the political system, which may increase the likelihood of demands for bribes by

public officials Public procurement corruption is generally an area of dispute. The World Bank & IFC's Enterprise

Surveys 2009 find that only very few companies expect to bribe to secure government contracts,multiple corruption scandals have emerged over the years, involving politicians and bureaucratstaking kickbacks from companies in exchange for awarding public contracts

The Brazilian tax system is complex and reportedly prone to corruption. It is reported that taxcollectors frequently ask for bribes to relax assessments and inspections, to refrain from pursuing acts

of tax fraud or to give advice on the legal possibilities of reducing tax obligation

Political Risk Analysis Report-Brazil-Oil Sector-Societal Factors

Source: CIA world handbook and Transparency International


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Major Historical De-Stabilizing Incidents

Major economic incidents resulting in destabilization in the last 20-25 years

1979: Major oil shock nearly doubled the price of imported oil. 1980: Rise in worlds interest rate increased BOP problems 1981: Real GDP declined by 4.4% 1982: Mexican debt crisis ended brazils access to international financial market 1987: Moratorium on foreign debt service 1992: Stabilisation plan introduced to stabilise inflation and interest rate. 1994 second phase of stabilisation plan introduced 1994 new currency introduced with fixed pegging with US dollars 1998 Brazil receives 41.5 Billion USD IMF led international financial support. 1999 Brazilian Real removed fixed pegging with USD. 2004 GDP growth started at 5.7%

High GDP growth rate period started at 7.5% in 2010

Political Risk Analysis Report- Brazil-Oil Sector-Major Historical Incidents


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Major Historical De-Stabilizing Incidents

Major Political Incidents resulting in destabilization in the last 20-25 years

1964 : Military dictatorship governing started 1968-73 : Political imprisonment, deaths, deportation occurred 1973: Official censorship started 1985: Civilian rule started following election of President Tancredo Neves 1994: President Collor impeached 2005: Lulla government suffered a serious blow with several accusation of corruption

and misuse of authority.

Major Terrorism Incidents resulting in the last 20-25 years In 1969 US Ambassador to Brazil Clarles Burke kidnapped by Marxist revolutionary

group MR-8 There has been no major terrorist incident in past many years.

Major Politically motivated incidents resulting in withdrawal/delay in Foreign investment inthe 10 years

None reported in past many years

Political Risk Analysis Report-Brazil-Oil Sector-Major Historical Incidents


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Table of contents

Economic Factor

Political Factor

Societal Factor



Assessment



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Rating By External Agencies

Short Term Political risk By ONDD : 2.5

Medium to long Term Risk By ONDD: 3.5

Special transaction Risk by ONDD: 2.5

Political Risk Analysis Report-Brazil-Oil Sector-Major Historical Incidents


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Table of contents

Economic Factor

Political Factor

Societal Factor



Assessment



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Assessment

Expropriation : Less Risk of Expropriation

Terrorism : Practically zero terrorism incidents

Selective intervention : None Reported very less risk

Restriction cross border Transfer of resources : There is normal tariff barrier forcross border trade

Non Neutrality of legal environment : Neutral Legal Environment

Regulation with different impact on foreigners : Nothing substantial

Cross fire problems : None reported very less risk.

Political Risk Analysis Report-Brazil-Oil Sector-Assessment

Strength Factors


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Assessment

Political Risk Analysis Report- Brazil-Oil Sector-Assessment

Weakness Factors

Taxation concerns : High and complex taxation system resulting in higher

compliance cost Investment Restriction : 2% percent tax on FDI to restrict the flow.

Operating restriction : Some reporting requirement in Toll manufacturing andcontract manufacturing


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Political Risk Analysis of Brazil

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