What happened
Shares of Centrais Eletricas Brasileiras SA (EBR -0.68%), or Electrobras, sold off on Wednesday, slumping more than 16% by 10:45 a.m. EDT. Driving the downdraft were comments by Brazil's leading presidential candidate suggesting that he's opposed to fully privatizing the electric company.
So what
In an interview on TV Bandeirantes, Jair Bolsonaro, the leading presidential candidate in Brazil, said that selling more of the country's power-generation assets would leave Brazil "in the hands of China." The market interpreted these comments to suggest that he's against the full privatization of Electrobras, which is a major utility in the country. That would mean the company would remain in state hands, which has mismanaged it in the past.
Image source: Getty Images.
Brazil's Mines and Energy Ministry first proposed selling the country's 41% stake in Electrobras last fall. That move would have raised more than $3 billion for Brazil, giving it the funds to bridge the gap in its fiscal budget. Meanwhile, it would free the company from government intervention, which has used its control to keep electricity rates low so that it could fight inflation and spur economic growth. A fully privatized Electrobras, on the other hand, would be able to set market rates, which would improve its profitability and balance sheet.
However, Brazil has been reconsidering the privatization of the company, recently removing the hoped-for windfall from the sale from its budget. Now a sale looks even more unlikely given Bolsonaro's comments that he's opposed to it because the company could potentially fall into the hands of Chinese investors.
Now what
There's increasing uncertainty surrounding the future of Electrobras, though it appears as if the company will remain under the control of the Brazilian government, which has mismanaged it in the past. Because of that, investors would be wise to steer clear of this company, especially since there are plenty of better ways to invest in Brazil.
