Our Country Risk team expects former president Luiz Incácio de Silva (Lula) to win the October presidential elections in Brazil over incumbent Jair Bolsonaro. Despite a narrowing in the polls in recent weeks, we maintain our view that Lula, the leader of the left-wing Partido dos Trabalhadores (PT) will win Brazil’s upcoming presidential election in a second-round run-off on October 30. Lula’s victory would mark a shift to the left in policy for Brazil, following the leftward trend seen in regional peers over their recent elections. This shift in policy direction would likely lead to higher fiscal spending and a greater degree of state involvement in sectors across the Brazilian economy.
Lula’s government is expected to strengthen the state’s role in the energy sector, with a key initiative being the halt of ongoing privatisation efforts and attempt to rollback previous actions. The former president has been vocal about his opposition to the privatisation of state-owned utility Eletrobras and the proposed privatisation of the national oil company Petrobras. Under Lula, we expect the government to halt divestment processes underway in relation to Petrobras and potentially also attempt to reverse processes completed in recent quarters, including most notably the privatisation of Eletrobras, completed in June 2022 by the Bolsonaro administration through a USD7.0bn share offering. These steps would be in line with Lula’s goal of increasing state control over these companies in order to utilise their investment strategies for national objectives such as energy security, power mix diversification and decarbonisation. For Eletrobras in particular, Lula has indicated plans to use the company to advance initiatives such as the rural electrification program Luz para Todas to drive socio-economic development and leverage the company to give the government a greater ability to control electricity tariffs.
In our view, a reversal of the privatisation of Eletrobras remains unlikely. The structure of the privatisation included legal and financial measures making its reversal difficult, such as a measure which adds premiums on the price of shares for entities seeking to build a large stake in the company. Lula has signalled he will pursue a reversal through court challenges and possible share repurchases. However, we expect the effort to be unviable economically for the government due the cost of the shares necessary to regain control. We highlight the risks present should Lula move forward with his stated plans on reversing the privatisation. The process would require lengthy court challenges which in our view would create uncertainties surrounding the operations of Eletrobras.
With Petrobras still under government control, however, we expect Lula’s policies will have a greater impact on the company, with potentially significant impacts for the power sector. A higher degree of state control of Petrobras could drive increased investment in non-hydro renewables, particularly in Brazil’s nascent offshore wind industry. In May 2022, it was announced that the state-owned company was evaluating the feasibility of constructing a 4GW offshore wind farm in partnership with Equinor. Brazil’s generation mix is currently dominated by hydropower, creating risks to supply from weather events such as droughts and making diversification a key energy security objective. Additionally, expansion of the country’s hydro fleet has increasingly been opposed by activist groups due to the environmental impacts of hydropower development on indigenous lands. Lula’s victory could reinforce and potentially accelerate efforts to develop offshore wind and other renewables capacity through Petrobras, given his prioritisation of decarbonisation compared to the current government. Further, a more renewables-oriented Petrobras would align its operations with Lula’s objectives to diversify the power mix and lead the nation in a transition to a decarbonised economy.
While Lula has intentions to bring Petrobras more in line the decarbonisation strategies of other large energy companies, we do not expect a full shift toward renewables development for the firm, and believe his administration will remain overall supportive of the oil and gas industry. During the campaign, Lula's main environmental concern has been protection of the Amazon rainforest rather than the impacts of offshore crude oil production and we do not expect to see tighter regulations on the sector from his administration.
We expect investment in the nation’s power sector to remain strong with Lula to be broadly supportive of private sector participation in the market, particularly the non-hydro renewables segment. While a leftward shift in policy poses some risk to Brazil’s market-friendly business environment, we believe Lula will remain open to private sector investment in the power sector, outside of his approach to Petrobras and Eletrobras. Brazil’s well-established legal frameworks and structured auction processes have facilitated robust investment in the market in recent years, making it a growth leader in the region. Growth has been particularly strong in the non-hydro renewables segment, with 166MW of solar and 183MW of wind capacity awarded in the latest auction finalized in May 2022. We expect Lula will want to maintain the strong level of investment currently present in Brazil, particularly to drive growth in renewables to meet stated diversification, decarbonisation and development goals. However, the candidate has signalled a preference for sustainability-focused public-private partnerships (PPPs) to develop large infrastructure projects. This aligns with his overarching strategy of further state involvement in the economy while also creating opportunities for private investment. As such, PPPs are likely to become more prevalent under a Lula government, especially in the development of larger utility-scale projects.
Should Bolsonaro win in October, we expect Brazil would see a continuation of broader power sector trends with the possibility of added support for fossil fuel generation. While the Bolsonaro administration has done little to advance environmental or climate goals, non-hydro renewables have experienced strong growth in the years since he has entered office. If the i