After much delay, the release of Petrobras’ audited 4Q 2014 results proved to be a muted and anti-climatic affair though it was very, very expensive. There was relief that the booked losses, and specifically the write down attributed to an on-going corruption scandal, were finally quantified and out in the open.

The numbers themselves were eye-wateringly high – a Brl 50.8 billion ($16.8 billion) write-down, with 12 percent of that directly attributed to bribery and kick backs linked to a number of political parties, including most prominently the president’s own Worker’s Party (PT). With investors and the public in the dark about the multi-year costs associated with the corruption scandal, the eventual Brl 6.2 billion identified as being the direct result of the kick-backs, if not exactly pleasant surprise, really was one that could have been a lot worse. ‘Kitchen Sinking’ accounted for the remainder of the mammoth charge; eager to start with a clean sheet, the new management has taken charges for everything that has gone wrong for the company over the past few years. These would have been brought on by inadequate controls such as poor planning, cost overruns as well as external pressures over which they have no control, such as the weak oil price.

To provide some perspective, Petrobras’s use of the red pen wiped out the equivalent of the past four years profits and net borrowings of Brl 282 billion ($92 billion) makes it the most indebted company in the world. And yet the share price has staged an impressive rally, climbing 39 percent year to date, as well as exerting an influence over the broader index Ibovespa, which has risen by 16 percent over the same period.

Brazil watchers have been greatly encouraged by the recent moves at Petrobras, effectively ‘Brazil Inc’. The way in which company management has been able to allay investors near term concerns and recalibrate market expectations in the space of a few months provides Petrobras with much needed breathing space.  Cuts in capital expenditure will alleviate pressure on the balance sheet, while a period of consolidation will allow management to focus on improving the company’s operating efficiencies, rather than always looking to bed in new acquisitions.

There are sharp parallels with the macro picture for Brazil. A range of issues have combined to explain away some of the issues the company needs to solve. Just a few of them include cutting spending (social security reform is a must), reforming the tax system (it take 2,600 hours to prepare and pay taxes in Brazil compared with 75 hours in Hong Kong), instigating a wide range of economic reforms covering employment, social security and high import tariffs. State bank BNDES offering subsidized loans benefitting large Brazilian corporates who do not need the assistance at the expense of smaller companies who do, all the while undercutting the private banking sector.

In her second term President Dilma wisely decided to hand economic policy to a new team with experience in the private sector. Achieving the goal of a primary surplus of 1.2% of GDP will reflect a completely different course, based on fiscal probity rather than one reliant on high levels of consumer spending. Focusing on this target, one of the first announced by the new team as well as targeting inflation will mark a completely different course to the consumer growth model which operated during the early part of the this century but has ground to a halt under the pressure on high relative and absolute levels of household debt.

Much as Petrobras has now be ‘rebooted’ from an investors perspective, and though the next couple of years will be difficult for the company as it restructures more in line with its capabilities, shareholders has been rewarded with the price rally.  Investors are waiting to deliver a similar verdict on Brazil. At this stage it is too early to make that call, and the immediate hurdle and focus of investors attention is the primary surplus target. Achieving this target will be important if the country is to maintain its investment grade rating. Despite of the tough economic conditions, partially alleviated by the recent bout of currency weakness, we do expect the government to achieve its goals, leading to a resumption of broad based growth in 2016.