Brazilian Shipping Market – a Brief Overview – 2020
An overview of the Brazilian shipping market for 2020 must be considered from two different perspectives, i.e. one that takes into consideration the Brazilian economy as a whole and the other which looks at the specific peculiarities of the shipping sector.
From the broader perspective of the Brazilian economy, the resumption of economic growth by Brazilian companies in general depends basically on structural reforms that can reverse the negative trend started in 2014. In this area a first reform modifying the country's pension system was sent to the Congress by the newly elected Government and approved in October 2019. This change had been unanimously considered sine qua non for re-balancing the public finances. The new system will reduce government expenditure by around 800 billion reais (approximately US$200 billion) in the next ten years. In addition, the federal government put two other reforms before the Congress in November 2019, both of which are expected to be approved in 2020: (i) a tax reform that would reduce the complexity and bureaucracy of the Brazilian tax system and (ii) a new Federal Pact with an emphasis on decentralization and a strengthening of the States and municipalities, which will lead to a new sharing of costs and responsibilities by all entities of the Federation.Although slowly, the economic policy of the new Federal Government seems to have produced its first positive results by the end of 2019. The public deficit, which was estimated in January 2019 to be at R$139 billion, was effectively reduced to approximately R$80 billion by the end of the year. The Basic Interest Rate (SELIC) of the Brazilian economy underwent an intense reduction last year, falling from 6.5% in January 2019 to 5.0% in October 2019 (and might still be further reduced until December). Inflation is under control, the annual rate being at the centre of the Brazilian central Bank’s target (3.5% p.a.). Large domestic reserves have been preserved in the region of US$370 billion. Finally, the gross domestic product (GDP) in 2019 increased when compared to 2018.
In terms of the shipping sector itself, the prospects are good for both the cabotage trade and offshore oil and gas activities.
In respect of cabotage, the Federal Government is pressing forward an agenda of regulatory changes named “BR DO MAR” which aims at increasing investments in and the efficiency of domestic shipping. Amongst the new policies, a significant modification was already implemented in November 2019, namely a tax exemption on the import of foreign vessels, which is aimed at reducing the costs of renewal for Brazilian cabotage. It is estimated that the overall cost to import foreign ships will be reduced 30% to 40% as a result of this policy. Studies into other changes were still in progress when this overview was written and are expected to be enacted no later than early 2020. Among the reforms being contemplated include more open rules for the chartering-in of foreign cargo vessels by Brazilian shipping companies and lower bunker prices (due to tax exemption). The more complicated and sensitive matter of labour costs when Brazilian crews are engaged is being analysed as well.
Concerning the offshore oil and gas activities, the good news has been the new rounds of auctions of pre-salt areas and the financial recovery of Petrobras after some difficult years fighting corruption and high indebtedness. An auction held on 6th November 2019 raised 70 billion reais (around 17 billion dollars) for two blocks (Buzios and Itaipu) and Petrobras’ bid was the winner in a consortium with the Chinese CNOOC and CNODC. Simultaneously, in the second semester of 2019 Petrobras achieved a new production record of 3.1 million barrels daily and also started a vigorous divestment plan whereby subsidiaries and other non-primary business are being privatized so the company can focus on its core activity of oil and gas production. Further auctions are expected in 2020, probably under different and more attractive terms for the oil companies.
Therefore, in a nutshell, considering the legal reforms already achieved and the new regulatory legislation which is expected, combined with good economic fundamentals, such as a re-balancing of public finances, bringing inflation under control and lowering interest rates, the prospects for Brazilian shipping in 2020 are indeed positive - definitely much better than in 2018 and early 2019.