Brazil meat scandal could spark billions in losses

A diplomatic offensive from Brazil's president Michel Temer eased the meat scandal

Brazil’s rotten meat scandal may have weathered the worst of the storm, but financial losses from the corruption saga could still reach $4.8 billion (bn), Fitch Ratings has claimed.

Over a fortnight ago, Brazil’s federal police launched the biggest operation in their history after more than 20 meat production plants faced allegations of flogging gone-off beef and bribing health inspectors to get away with it.

Now Fitch Ratings, one of the big three US-based credit rating agencies, said losses could reach BRL15bn ($4.8bn) across Brazil’s agribusiness supply chain if the investigation were to be expanded significantly.

Long-term financial risk from the corruption scandal should be limited, providing the government-run investigation sticks to the 21 meat production plants currently under inspection. As the scandal appears to be winding down, key export markets that had slapped partial bans on Brazil – including China, Hong Kong, Egypt and Chile – have relaxed trade restrictions.

‘Too early’ to assess damage

It has led to a mood akin to optimism across Brazil’s agribusiness sector as the country’s government responded quickly to an international outcry.

So long as the scandal does not take an unexpected twist, the investigation will wind down. Brazil’s government has indicated that the scope of the investigation should not be expanded.

Fitch Ratings said last week that it was “too early” to assess the final financial and economic effects of corporate fines, regulatory sanctions and the impact on domestic and international consumption of Brazilian meat.

Still, the effects of the investigation, dubbed Operação Carne Fracas (Operation Weak Flesh), could see some states hit harder than others, according to the agency.

Under a worst-case scenario – in which Operation Weak Flesh begins investigating new meat processing sites leading to a prolonged probe – states such as southerly Paraná could see negative effects.

Parana generates little tax revenue from the meat industry. However, other sectors linked to animal protein – including packaging, feed, machinery, retail and utilities – could affect the state’s tax revenue if a systematic shutdown of the meat industry were to ensue.

Fitch estimates 5% of Parana’s tax revenue could be at risk, although this would not necessarily dent the state’s credit rating. If job losses in the meat sector happen or if local consumption of meat drops, tax revenue could fall as the state misses out on revenue made from income tax or meat sales.

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