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Investors relieved as Lula prospects dim

24 Jan 2018 21:48 GMT
Investors relieved as Lula prospects dim

Rio de Janeiro, 24 January (Argus) — The business community is celebrating the almost certain barring of populist former president Luiz Inácio Lula da Silva from running for reelection, following a closely watched federal appeals court decision to uphold his earlier conviction on corruption charges.

The stock price of state-controlled Petrobras jumped successively as three judges cast their vote condemning Lula, with the São Paulo stock exchange, Bovespa, soaring to a record high. The Brazilian real, the local currency, also strengthened throughout the day.

Lula, who ran the country in 2003-11, was a central figure in the sweeping Lava Jato probe centered on systemic corruption at Petrobras.

Foreign oil companies that have begun to return to Brazil´s rich offshore basins feared that a court decision to overturn the conviction would presage a return to Lula´s nationalist policies.

The unanimous decision by the appellate court in the southern city of Porto Alegre is likely a fatal blow to Lula's aspirations to return to the presidency in October elections. Despite his first conviction, handed down in July 2017, Lula remained a frontrunner in recent polls to win back the presidency.

Under current law, politicians convicted in the second instance for specific crimes, including the passive corruption and money-laundering charges for which Lula was convicted, are barred from seeking office for eight years. The former president's legal team is almost certain to challenge the rule and others keeping him from office, with legal battles likely to continue up to the election.

The charges against Lula relate to money funneled from overpriced refinery construction contracts with Brazilian conglomerate OAS, which in plea deals with prosecutors admitted to using some of the R8mn ($2.5mn) gleaned from the inflated contracts to acquire and customize a beachside apartment for Lula and his family in the final year of his presidency.

Lula and his supporters, led by his impeached successor Dilma Rousseff, have framed the case against him as political persecution and part of a broader coup perpetuated by the Brazilian elite, many of whom have been arrested and convicted under the Lava Jato umbrella.

For most supporters of Lula's Workers Party (PT), among them high-profile intellectuals and artists such as Noam Chomsky and Oliver Stone, the case against Lula is an extension of the August 2016 impeachment of his protégé Rousseff, who was forced by Brazil's scandal-ridden congress to hand over the presidency to her then-vice president Michel Temer after being convicted of illegal budget maneuvers.

The highly unpopular Temer, leader of the influential Brazilian Democratic Movement (MDB, formerly PMDB), has said he will not seek re-election, and is also barred by the same rule that would prevent Lula from running, has made economic advances, but faces headwinds in reforming the pension system in the last year of his truncated term.

Today´s decision, though far from the final word on Lula´s eligibility to run, will likely give investors, unsettled by Lula's recent pledges to move further to the left if re-elected, more confidence heading into a pivotal election year. If Temer is able to push through a pension reform, Brazil's economy could return to robust growth this year, according to some economists.

The possible re-election of Lula, whose nationalist policies in the oil sector arguably facilitated corruption, has been a particular concern for oil companies that have been regaining confidence after Temer rolled back many of the protectionists policies enacted during PT's 13-year rule, such as a 2010 rule that obligated Petrobras to hold a 30pc operating stake in pre-salt projects.

Speaking today at the World Economic Forum in Davos, Petrobras chief executive Pedro Parente waived off concerns that Brazil's next president could enact radical changes in the oil and gas sector, saying the responsibility of a candidate and an elected leaders are two different things.

Appointed by Temer in May 2016, Parente has overseen the rapid recovery of Petrobras, which lost around $19bn to corruption. He now says he is considering staying in his position after this year's elections.

If Lula is ultimately barred from registering as a candidate, a situation his supporters claim would constitute a fraud, Brazil's electoral landscape should change significantly.

Without Lula in the race, far-right Jair Bolsonaro, who has been gaining in polls as center-right voters move away from traditional parties implicated in Lava Jato, could lose momentum.

The collapse of extremist candidates would likely open space for centrist rivals, such as current finance minister Henrique Meirelles and Luciano Huck, the popular TV host considering a run.

But Lula will still play the role of kingmaker. Although he was sentenced to around 12 years in prison today, he will likely not face jail time before many other corruption cases against him are decided. His enduring popularity could be a vehicle to unify a fractured left, with a hand-picked substitute emerging closer to the election.