Brazil: Power sector benefits from reduced government intervention

31 January 2017

President Michel Temer will find it difficult to implement the fiscal reforms required to improve Brazil’s economic outlook in 2017. Popular opposition to any spending cuts will contribute to an uptick in protests in 2017. However, Brazil’s power sector will benefit from reduced government intervention, privatisation and regulatory reform in the medium term.

Security Environment

Temer’s planned spending cuts to health, education and pensions will be a source of protests by labour unions and public sector employees in 2017. Civil groups such as Vem Pra Rua will also mobilise in protest at persistent corruption scandals. November and December 2016 saw an uptick in protest activity. A ‘National Day of Mobilisation’ on 11 November 2016, saw demonstrations in 18 states, with 10,000 marching in Belo Horizonte. Most protests passed peacefully, but in Brasília some protestors burned a number of cars. The police responded with tear gas and rubber bullets.

A worsening fiscal situation at the state level will exacerbate protest risks in H1 2017. State budget deficits have reached around 10%, leading to the sacking of thousands of civil servants and reduced social spending. In December 2016, following the elimination of a cash transfer programme for low-income families and a hike in public transport costs, protesters attacked Rio de Janeiro’s state legislative assembly. Eight police officers were injured. However, protests in Brazil are largely peaceful with limited incidents of violence and property damage.

Trading Environment

The appointment of investor-friendly Temer in August 2016 boosted business confidence. However, this has waned as it has become apparent that the president will struggle to implement much needed fiscal and pension reforms in 2017. Although Congress approved a ceiling on fiscal expenditure in December 2016, deep opposition from within Congress, labour unions and civil society will stall further unpopular measures this year. 

There will be a narrow reduction in the fiscal deficit from 10.0% in 2016 to 8.9% in 2017. Political risks will weigh on investor sentiment in 2017, contributing to a challenging growth outlook. Recession continued into Q3 2016, with a 0.8% contraction in GDP from the previous quarter and growth is forecasted at 0.4% in 2017.

This will contribute to sluggish near term growth in power demand. In December 2016, the government cancelled a second reserve energy auction, citing sufficient power capacity in the market. Despite this, there is a positive longer term outlook for the sector. Temer supports power sector privatisation and this will open up investment opportunities in generation and distribution. 

The government and state-owned utility Eletrobras will divest stakes in six power distribution companies and award concessions for five hydropower plants in 2017/18, following the sale of Eletrobas’ stake in distributor Celg-D in November 2016. As a result, between 2017 and 2025 total power capacity is forecasted to grow by an annual average of 2.6%.

Investment Environment

Obtaining environmental licences for power projects can be a protracted process in Brazil. Indigenous communities have a right to be consulted on potential projects and this can lead to legal challenges and, in some cases, the suspension of projects. In August 2012, a regional federal court suspended construction on the Belo Monte hydro-power dam. 

Whilst construction eventually proceeded, in January 2016 the operating licence was revoked until owner Norte Energia SA met requirements to protect local indigenous communities. Licenses were once again restored, and the plant has been coming online gradually since 2016 and will be fully operational by 2019.

President Temer’s efforts to reduce government intervention in the power sector will improve the business environment. The auction mechanism for energy contracts has been revised. Transmission capacity must now be taken into account when awarding contracts, and this should minimise the number of project delays. The role of state development bank BNDES will also be reduced, although the bank launched a USD 144 million green bond fund in November 2016 to support renewable energy projects. This will contribute to strong growth of 11.3% year-on-year in non-hydro renewables capacity in 2017.

CPS Risk Outlook Feb 17

*Pricing is dependent upon the deal specifics and commodity in question.
† There is limited appetite or capacity in the market.

In this month's risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for South Africa, South Korea, Kenya and the Democratic Republic of Congo, all of which have been the subject of recent enquiries from JLT's client base.

Brazil - risks impacting daily trade and investment

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For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com