Anna Edgerton and Sabrina Valle Rio de Janeiro
THE CORRUPTION scandal at Petroleo Brasileiro that has spread to Brazil’s biggest builders is threatening to derail President Dilma Rousseff’s efforts to revive Latin America’s largest economy.
The TCU, a federal court that acts as a public-spending watchdog, said it was concerned the probe into an alleged money laundering and bribery scheme dubbed “The Car Wash” could delay infrastructure projects across Brazil.
Odebrecht, Queiroz Galvao, OAS and six other builders whose headquarters have been searched or executives arrested hold at least 70 billion reais (R303bn) in Petrobras and government contracts, including for the 2016 Olympic Games and hydroelectric dams in the Amazon.
With Brazil’s infrastructure consistently ranked among the worst in the world, any delays to new roads or other projects will hurt industries ranging from manufacturing to farming. That will make it harder for Brazil to boost growth after slipping into a recession in the first half of the year.
“Brazil will probably have low growth in 2015, and obviously this won’t help,” Carlos Kawall, the chief economist at Banco J Safra in Sao Paulo, said. “You have the issue of the capacity of these companies, if they are financially affected, to carry out their obligations.”
Odebrecht’s projects were on schedule and it won work with Petrobras legally through public tenders, it said. Queiroz Galvao, OAS and Petrobras did not respond to requests for comment on the economic impact of the corruption investigations.
Jorge Gerdau Johannpeter, the chairman of Gerdau, Brazil’s biggest maker of long steel, warned last week that any slowdown in projects would “absolutely” affect economic growth.
Marcelo Carvalho, BNP Paribas’ chief economist for Latin America, said on Monday that the scandal could have a “significant impact” on gross domestic product (GDP) should Petrobras cut its $220.6bn (R2 trillion) investment plan. “There’d be a cascading effect forcing Petrobras contractors to also reduce investments,” he said in a conference call.
A 10 percent cut in Petrobras’ capital expenditures would curb GDP growth by 0.5 percentage points, LCA, a Sao Paulo-based consulting firm, said in a research report last week.
Brazil is expected to report this week that the economy grew 0.2 percent in the third quarter, according to the median estimate of 34 economists in a survey. That follows back-to-back quarterly contractions in the first half of the year.
Rio’s economy “will be impacted by the crisis at Petrobras”, state Economic Development secretary Julio Bueno said this week. The builders were “the same as banks – too big to fail”.
Rousseff’s press office didn’t respond to an e-mail seeking comment on how the crisis will impact the economy.
Sergio Moro, the judge presiding over the case in Curitiba, Brazil, ruled against freezing the accounts of companies under investigation, citing concern such a move would be a major blow to Brazil’s economy. Prosecutors had requested blocking funds equivalent to as much as 10 percent of the contracts under investigation.
A federal prosecutor has also asked the TCU to ban contractors in the probe from bidding on new contracts with Petrobras.
“Considering the magnitude of the crimes and the extended period of time, there is no possibility to immediately block 5 percent or 10 percent of the contracts with Petrobras,” Moro wrote in the November 13 decision. “These are the largest contractors in the country.”
Brazil is consistently ranked as one of the most graft-ridden countries by the World Economic Forum, which listed it 133rd of 148 countries for diversion of public funds in its Global Competitiveness Report.
Even without their assets frozen, Petrobras and builders will face rising costs to finance projects already under way. Petrobras, which delayed releasing third-quarter earnings because of the investigation, said on November 13 that it planned to publish unaudited statements within a month.
Bank of America said Petrobras might have difficulties borrowing in international debt markets until it provided results that had been audited.
Fitch Ratings in a statement last week put all Brazilian heavy construction companies on negative watch until there was more clarity on the results of the investigation.
The legal battle could allow foreign builders such as Paris-based Technip to gain market share, according to law firm Mattos Filho. – Bloomberg