What to expect from Brazil’s new government

On October 30, Brazil elected Luis Inaclo Lula da Silva (Lula) to be its new President. Lula will take over from President Jair Bolsonaro on 1 January 2023. During his campaign, Lula hinted at some reforms that would potentially impact the energy and mining sector, particularly in relation to his environmental and climate agenda. 

While it is unlikely that Lula will seek to reverse companies that have already been privatised, like Eletrobras, he may halt plans to privatise any other organisations. For example, the state electricity firm Cemig and oil company Petrobas were both being considered for privatisation by Bolsonaro. Refinery sales that are currently in process may also be halted, including Abreu e Lima, Alberto Pasqualini and Gabriel Passos, assuming the sales aren’t completed by 31 December 2022.   

A renewed focus on renewable energy is also likely to be high on Lula’s agenda. To enable a transition to green energy he may introduce tax incentives, subsidise credit for the construction of wind and solar parks or the production of green hydrogen. Greater scrutiny of environmental permits is also likely. In addition, Petrobas may be reviewed to determine if its portfolio can be diversified to further enable the transition to green energy. 

Key to Lula’s climate and environmental policies is the protection of the Amazon forest. The largest rainforest in the world covering over six million square kilometres, the Amazon is crucial to the global environment as it absorbs huge amounts of carbon. At the COP 27 Summit in Egypt, Lula announced his commitment to achieve zero deforestation and the degradation of biomes by 2030. Illegal mining for gold in the Amazon has been a persistent issue that Lula is likely to seek to stamp out to protect the rainforest.

These environmental initiatives may be coupled with a renewed focus on strategic natural resources and mining that supports the transition to greener energy. The mining industry may also see royalties increased under Lula to tap into potential windfall gains and high value minerals that will impact significant global players like Vale. Brazil is the second largest producer of iron ore, manganese, tantalite and bauxite in the world. 

With inflation impacting Brazil, like the rest of the world, Lula may also seek to make changes to pricing policies. Petrobras currently follows the international oil price and exchange rate, but we may see benchmarks introduced that also consider national and import prices. Another option would be to reduce Brazil’s dependence on fuel imports by expanding domestic refining capacity. 

Supporting these changes, Brazil may also see an increased focus on ESG in investment transactions in the future. This could potentially result in making the investment environment more favourable to those who promote environmental and sustainable initiatives. 

We will no doubt see more of what plans Lula has for Brazil over the coming months, and will continue to watch this space closely.