Moody's talks political risk at Petrobras, Eletrobras

A report by Moody's Ratings on the risks to state-owned companies as political priorities shift found that increasing polarization in Latin America is creating uncertainty for public firms.

Although solid corporate governance can mitigate credit risks, frequent changes in public policy require these companies to adjust their business models or objectives to align with new government directives, often to the detriment of their financial goals, Moody's said.

Brazil’s federal oil company Petrobras and electric power utility Eletrobras, the latter privatized but with substantial government participation, also face credit risks due to state intervention, although robust governance structures are significantly limiting political interference. 

BNamericas talks to Moody’s senior vice president-analyst Carolina Chimenti and assistant vice president-analyst Murilo Pentagna about the political risk outlook for both firms.

BNamericas: What are the risks to Petrobras' financial health that a change of CEO would bring at this time?

Chimenti: CEO changes have always occurred at Petrobras; what Moody's analyzes is the impact of this change on the company's strategic and financial direction. In other words, a change of CEO in itself doesn't affect Petrobras' credit quality; what could affect it would be changes in financial policies, pricing policies, etc. 

BNamericas: Have the recent criticism and pressure by the likes of the mines and energy ministry affected the company's credit outlook?

Chimenti: There’s been no change in the rating due to the government's actions, but we’re observing a greater level of government interference in Petrobras. So far, this greater interference has not affected the company's financial health, but it’s a point we’re monitoring closely. 

What this political risk does is limit the company's rating intrinsically, especially when we compare Petrobras with the IOCs [international oil companies] that don't have such a level of political risk.

BNamericas: Does Moody's consider an increase in state intervention in Eletrobras to be likely?

Pentagna: The legal framework established at [Eletrobras’] privatization has proved resilient. Currently, we believe that any change to this structure would need the approval of the other shareholders. 

BNamericas: How could this affect the credit rating?

Pentagna: A unilateral interruption of current operational efficiency and tax policies by the government could have an impact on credit quality.

The Brazilian government is contesting the limits of its strategic control over Eletrobras, the country's dominant electric utility. 

While the government has held 46.5% of ordinary capital in Eletrobras since 2022 through direct ownership and assorted companies, its boardroom voting representation is capped at 10%. 

The government is contesting the voting restriction's constitutionality at the country's supreme court, while also seeking a negotiated solution at CCAF, the federal mediation and conciliation agency, which requires all shareholders to deliberate modifications to existing agreements. 

Increased voting control would allow more government interference in Eletrobras' current business plans, which include reducing personnel spending, integrating subsidiary Furnas into the parent, and negotiating with creditors to reduce its compulsory debt.