Moody's: Petrobras probe weakens Brazil's sectors

The corruption investigation into Petroleo Brasileiro S.A. (Petrobras) will negatively affect parts of the public and private sectors, but government support for the company is likely to help contain the credit-negative impact, says a report from Moody's Investors Service.

Petrobras' problems will negatively affect Brazil's oil and gas production chain, its construction and infrastructure sectors, real estate in Rio de Janeiro state and the companies that support these sectors.

Petrobras' heightened liquidity risks as a result of the delays in delivering audited financial statements as well as its reduced spending will impact the engineering and construction companies under indictment, but also larger infrastructure investment groups, according to the report "Petrobras Setbacks Worsen Hazards in Brazil's Public and Private Sectors."

"Low oil prices will exacerbate the deterioration in Petrobras' liquidity position in the mid-term," says Marianna Waltz, a Moody's Associate Managing Director. "It will also spread the negative effects down the supply chain, weakening the financial and operating performance of the vessels that are part of Petrobras' vital offshore production effort."

To counter its weakening liquidity, Petrobras has implemented spending cuts that will also have widespread implications for a variety of sectors in Brazil, including the public finances of Rio de Janeiro state. Highly dependent on oil, the drop in tax revenue and royalties from oil would affect everything from engineering & construction and oil& gas companies to real estate development in the state.

In addition, the probe could result in lower bank earnings, especially if public banks, already grappling with lackluster loan growth, have to support Petrobras to prevent wider economic fallout.

Given Petrobras' influence on the economy, the federal government is likely to be willing to support the company, financially, though it is less clear whether the government would be able to muster the very large amounts that might be required in the short time needed to avoid default.

"Petrobras plays a key role in long-term investment projects in Brazil," says Waltz. "A severe deterioration in its credit quality would put Brazil's banking sector, domestic capital markets and broader economy at risk."

The immediate implications for the sovereign's credit profile are limited. Moody's does not expect that government support to Petrobras would lead sovereign debt to exceed 70% of GDP under any scenario. The implications for the sovereign would principally depend on the credibility of the government's fiscal and economic policy response.

Moody's downgrade of all ratings on Petrobras on 24 February 2015 and the agency's downgrade of the ratings on several Brazil E&C companies since November 2014 reflect these risks.