Brazil’s political and economic scenario and O&G sectorial trends Ricardo Sennes PRESENTING PROSPECTIVA 2/20 MIAMI AREAS OF OPERATION • Strategic consulting for public policies • Intelligence & Analysis • Market-oriented institutional actions RIO DE JANEIRO 38 Experienced Professionals on our team 3/20 Political & Economic Context 4/20 FRAGMENTED POLITICAL SYSTEM • Weak party programs and identity Senate • Incentives for creating new parties 18 Parties • Complex governability PT PSB 10 6 PP • Hard to build a majority PSDB 7 PR 12 4 PSD 4 DEM Outros (8) 4PDT House of Representatives 3 PMDB PCdoB 1 PTB 3 25 Parties PROS 7 19 PPS 1 PSOL 6 PRB 1 REDE 4 PSC 2 PTdoB 3 PTC 1 PEN 3 PV 1 PSL 2 REDE 1 S/Partido 1 PMB 2 PSC 7 PMDB PPS 8 67 PCdoB 11 PHS 7 PTN 13 PV 6 SD 14 PT PTB 18 Outros (55) 58 PDT 19 PRB PSDB 22 PSB 50 32 DEM PP 27 PSD PR 47 35 42 5/20 THREE FACTORS HAVE CONTRIBUTED TO THE DEEPENING OF THE CRISIS FISCAL AND BURSTING OF TWO INFRASTRUCTURE AND INVESTMENT CRISIS BUBBLES OIL CRISIS Public Sector Indicators (%GDP) Automobile Oil 44 42,1 6 40,5 45 Production: Layoffs: 39,1 reduction of 22.8% between 2014 260 thousand since 2014 5 36,4 36,8 40 35,3 33,9 and 2015 Royalties: 35 4 3,11 Work stations: reduction of 25% in the 2,7 30 3 2,39 reduction of 10.2% in the same collection from 2014 to 2015 2 1,88 25 period 2 Source: Petronotícias Source: Anfavea 20 1 15 0 10 2009 2010 2011 2012 2013 2014 2015 2016 -1 -0,63 -0,73 5 Housing Construction -1,32 -2 0 Primary result Net dbt Financed units: Layoffs: 417 thousand 538 thousand in 2014 (2015) 319 thousand in 2015 Source: Focus (07/mar) Source: Abecip Source: Valor Econômico 6/20 TEMER HAS GOOD POLITICAL SKILLS GOVERNMENT • Temer and Rousseff: similar allied coalitions • Better governability LEFT-WING RIGHT-WING SUPPORT IN NUMBERS • 79% of members of the house came out in favor of the OPPOSITION government for at least 75% of votes Source: Basômetro; second mandate 7/20 TEMER’S MINISTERIAL APPOINTMENTS ACROSS PARTY LINES COVERS 70% OF ALL PARTIES IN CONGRESS 24 MINISTRIES Parties Ministers Represent. Senators PMDB 7 67 18 MA (1) PSDB 3 51 11 PA PP 2 47 7 (1) TO PE (4) PSD 2 34 4 AL (2) MT (1) BA DEM 1 29 4 (1) (1) PR 1 40 4 PTB 1 19 3 PPS 2 9 1 RJ (5) PRB 1 22 1 PR (1) SP (7) PSB 1 31 7 RS (5) PV 1 7 1 11 States 11 parties 356 (69%) 61 (75%) Simple majority 257 41 PEC (3/5) 308 49 8/20 COHESIVE ECONOMIC TEAM REVAMPS THE ECONOMIC TRIPOD ILAN GOLDFAJN DYOGO OLIVEIRA President of the Central Bank Minister of Planning (acting) HENRIQUE MEIRELLES PEDRO PARENTE Minister of Finance JORGE RACHID President of Petrobrás Secretary of Federal Revenue MARIA SILVIA BASTOS MARQUES MANSUETO DE ALMEIDA President of BNDES Secretary of Economic Monitoring/MF 9/20 Temer’s two main agendas Adjustments Positive agenda • Administrative • Labor • Fiscal / Social • Tributary • Industrial • Business Environment • Social Security • Infrastructure + O&G • Foreign Commerce 10/20 ADJUSTMENT AGENDA DEPENDANT ON CONGRESS TYPE MEASURES LEGISLATIVE PROCESS PERSPECTIVE Reduction of ministries from • HOUSE OF REP. symbolic vote. 31 to 24 • SENATE 44 x 6 Administrative End stability of careers for • Will be sent to the Congress public servants • Strikes • 2016 approved: BRL170 billion Reduction of goal • 2017 approved: BRL139 billion Roof for expenditure • House of Rep. approved Fiscal / Social increase • Senate: November-December Unbundling government • HOUSE OF REP. 340 x 96 revenue (DRU) • SENATE 54 x 15 • Depends exclusively on the End subsidies government ! Industrial Raise taxes • End of 2017 ! • Will be sent by the end of November Social Security Social Security reform • House of Rep. 6 months; Senate 3 months approved/easy to approve medium difficulty for approval/resistance hard to approve/highly controversial 11/20 POSITIVE AGENDA IS EASIER TO IMPLEMENT TYPE MEASURES LEGISLATIVE PROCESS PERSPECTIVE Prevalence of negotiations • 2017’s second semester Workers over legislation rights Regulation of outsourcing • 2016’s second semester ! Tax simplification with ICMS • 2017’s first semester reform Taxes • 2017’s first semester Pis/Cofins • Proposals: 2017 Autonomy of regulatory • Senate: approved by special Committee agencies • House of Rep. has to vote on the issue Business Public Companies • Signed into law environment Responsibility Law Central Bank autonomy • 2017’s first semester Expansion of concession • Depends exclusively on the government opportunities Infrastructure O&G • End of 2016 “New Pre-Salt Law” • HOUSE OF REP. 292 x 101 • SENATE 40 x 26 • Easier to implement Opening of new markets • Argentina, Colombia, Chile, Mexico, USA, Foreign trade Europe, China • Complex negotiations. Support from Change in Mercosur model Argentina ! 12/20 RECOVERY OF ENTREPRENEURIAL CONFIDENCE CONFIDENCE OF THE INDUSTRIAL ENTREPRENEUR 55,70 60,50 45,50 53,50 44,10 42,00 42,40 47,10 44,30 45,20 31,50 28,60 38,60 21,00 29,80 19,30 19,30 2009 2010 2011 2012 2013 2014 2015 2016 Source: ICEI/CNI CONFIDENCE OF THE CONSUMER 119,3 115,3 113,2 113,4 114,6 117,0 114,1 113,9 112,0 97,9 105,2 103,1 116,0 106,3 100,0 96,3 2010 2011 2012 2013 2014 2015 2016 Source: INEC/CNI 13/20 EXPECTATION OF RECOVERY IN 2017 GDP GROWTH (%) 7,5 5,8 6,1 5,1 4,4 4,0 3,9 3,1 3,2 3,0 3,0 3,0 3,0 1,9 1,4 1,1 1,00 0,1 -0,1 -3,8 -3,4 2000 2001 2016 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2017 2018 2019 2020 Source: IBGE Focus (Set) Bradesco (Set) 2015 • Lower family consumption rate inflation, unemployment, high interest rates • Lower government expenditure, but even lower revenue 2016 • Increase in government’s expenditures (short-term) acquire political support 14/20 UNEMPLOYMENT ON THE RISE IN 2016 UNEMPLOYMENT RATE (> 14 YEARS OLD) 11,6 11,8 11,8 10,9 11,2 11,3 8,9 9,0 7,9 8,0 7,9 8,3 7,5 7,4 7,1 6,9 6,9 7,2 6,8 6,8 6,2 6,5 jul-ago-set jul-ago-set jul-ago-set jul-ago-set mai-jun-jul jul-ago-set jun-jul-ago jan-fev-mar jan-fev-mar jan-fev-mar jan-fev-mar jan-fev-mar abr-mai-jun abr-mai-jun abr-mai-jun abr-mai-jun abr-mai-jun out-nov-dez out-nov-dez out-nov-dez out-nov-dez mar-abr-mai 2012 2013 2014 2015 2016 Source: IBGE 2015 Bradesco forecasts • 1.5 million jobs lost - more than 1 million in industrial sector • 2016: 11.2% • Only agribusiness had a positive result (9.8 thousand, CNI) • 2017: 12.6% 2016 • 2018: 12.2% • 2019: 11.7% • Unemployment rises steadily • 2020: 11.2% • 11.8% is the highest unemployment rate in last five years 15/20 MARKET EXPECTATION: DEVALUATION EXCHANGE RATE (BRL/USD) 5 4,1942 4,1552 4 3,5341 3,8969 3,2677 3 3,2092 3,2128 2,8937 3,2292 2,5791 2 1 0 Jul Jul Jul Jul Set Set Set Apr Apr Oct Oct Apr Apr Jan Jan Jun Jun Jan Jan Jun Out Out Fev Fev Feb Feb Mar Mar Mar Aug Aug Sep Nov Nov Dec Dec Ago Ago Nov May May May 2015 2016 Source: Central Bank Focus and Bradesco forecasts • 2016: 3.30 • 2017: 3.40 • 2018: 3.35 • 2019: 3.45 • 2020: 3.55 16/20 INFLATION AND INTEREST RATE: GRADUAL REDUCTION IPCA (%) 10,71 9,56 9,32 8,97 Focus and Bradesco 8,13 7,14 9,49 9,39 forecasts 7,87 • 2016: 6.80 • 2017: 4.93 : IBGE : • 2018: 4.54 • 2019: 4.50 Source • 2020: 4.50 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct 2015 2016 SELIC RATE (% A.A.) 14,25 12,5 Focus and Bradesco 10,75 14 forecasts 8,75 • 2016: 13.75 7,25 • 2017: 10.75 • 2018: 9.25 • 2019: 9.25 • 2020: 8.75 : IBGE : Jul Jul Jul Jul Jul Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Oct Jan Jan Jun Jan Jan Jan Jan Jun Mar Dec Ago Source 2010 2011 2012 2013 2014 2015 2016 17/20 O&G - Sectorial perspective 18/20 MULTISECTORIAL ROLE DURING LULA-DILMA Fiscal Policy (onerous transfer) 2 Monetary Policy (fuel price controls) STRONG PRESSURE 1 ON PETROBRAS MODEL IS UNDER REVISION BY THE TEMER ADMINISTRATION! Naval & 3 off shore industry (domestic contend) 4 Industrial Policy (inovation and investment policies) 19/20 NEW DYNAMICS FOR THE O&G SECTOR PETROBRAS • Lack of financial conditions to keep investments demand for private sector participation • High debt situation: sale of assets strategy to improve fiscal balance ECONOMIC MEASURES • Government’s initiatives for Brazil’s economic recovery: main features of Temer’s administration • O&G: sector chosen as a priority SECTORIAL MEASURES • Pro-market measures + more liberal regulatory policies • Attraction of companies to segments previously dominated by Petrobras 20/20 HIGHLY TECHNICAL AND LIBERAL TEAM IN STRATEGIC O&G INSTITUTIONS PEDRO PARENTE Petrobras’ President • Crisis management ability • Reverse the debt of BRL 450 billion • Negotiate privatization DÉCIO ODDONE National Oil Agency Director (ANP) • Experience with international investors • May redesign regulatory framework • Defends an open O&G market 21/20 HIGHLY TECHNICAL AND LIBERAL TEAM IN STRATEGIC O&G INSTITUTIONS LUIZ AUGUSTO BARROSO Energy Research Company Director (EPE) • May increase gas and wind energy in the energy matrix • ANEEL’s and Eletrobras’ development FERNANDO COELHO FILHO Minister of Mines and Energy (MME) • Advocates for development in the Northeast • Ministry deeply influenced by senator Fernando Coelho and PMDB 22/20 REGULATORY ISSUES RELAXED Next bidding rounds are expected to be held by July, 2017 PRE SALT LAW • End of Petrobras’ obligation to participate in the exploration of pre-salt oil (approved by Congress) • Flexibility in Petrobras’s participation + unitization of oil and gas fields: over USD 120 billion in investments LOCAL CONTENT POLICY • Current local content rules should be relaxed to create competitiveness • Next bidding round should happen under the new rules 23/20 PETROBRAS’S