RIO DE JANEIRO—As Brazil claws its way out of a brutal recession, it is bearing an extra burden: its biggest companies.

The country's best-known corporate names, including Petrobras, Vale and Odebrecht, thrived during Brazil's economic rise, delivering sizzling growth, investment and employment.

Now, many of those businesses are struggling, tainted by corruption, mired in debt, fending off bankruptcy, or sometimes all three. The scandals transcend borders and industries, and include privately held, state-controlled and publicly listed companies.

What they have in common is the damage they have collectively inflicted on Brazil and its global reputation. "Segments of the corporate sector are seen as radioactive," said Gustavo Franco, chairman of asset manager Rio Bravo and a former president of Brazil's central bank.

In the past two years, corruption scandals have chased away investors and thrown Brazil's political system into disarray, dragging the economy into its worst downturn in at least a century. Gross domestic product has likely contracted 7.1%, and economists on Monday downgraded their 2017 growth forecast to just 0.7%.

"What Brazil really needs right now is a transformation in terms of corporate governance, in terms of business ethics and values," says Cassia Carvalho, executive director of the Brazil-U.S. Business Council.

Brazil's recovery prospects remain clouded by the troubles of its behemoths. State-run Petró leo Brasileiro SA, or Petrobras, is a case in point. In 2014, prosecutors uncovered a bid-rigging and bribery ring that looted billions of reais from the oil giant over the course of a decade.

In exchange for inflated contracts, crooked contractors funneled kickbacks to Petrobras executives and dirty politicians. Several hundred million reais have been paid back to the company from the Swiss bank accounts of several participants in the scheme.

Petrobras says it was a victim of the scheme and is cooperating with authorities.

Even so, Petrobras has written off some $37 billion to reflect corruption-related losses, overvalued assets and falling oil prices. It has slowed new projects drastically and is scrambling to sell off assets to finance a debt load of $123 billion, the largest in the global oil industry.

Since March 2011, Petrobras has lost $181 billion in market capitalization, more than any company in the world. The runner-up, mining giant Vale SA, is headquartered a few blocks away and has shed $130 billion, according to FactSet. Vale has been roiled by volatile commodity markets and is fighting a nearly $50 billion lawsuit related to a dam failure at its Samarco joint venture that killed 19 people last November.

Big construction companies, including Odebrecht SA, are accused of forming a cartel to bilk Petrobras and remain blacklisted from doing business with the government agencies they depend on for contracts. Some have filed for bankruptcy protection; others are watching their credit ratings spiral downward.

Odebrecht apologized on Dec. 1 for "improper practices in its business activity" and said it "has learned several lessons from its mistakes."

Among those enmeshed in various criminal investigations are Brazil's biggest electric utility, state-run Centrals Elé tricas Brasileiras SA, its two largest private-sector banks, Banco Bradesco and Itaú Unibanco, as well as its largest steelmaker, Gerdau SA, and executives from the world's largest meatpacker, JBS SA.

Embraer SA, the homegrown aircraft maker that Brazilians have long held up as an example of how they can compete globally, agreed in October to pay $205 million to settle a U.S. foreign-bribery investigation.

Eletrobras says it is aiding federal authorities, who are focusing on its employees, contractors and suppliers.

Bradesco, Itau and Gerdau have denied wrongdoing. JBS says the company the company itself isn't a target of investigations, and its executives have denied wrongdoing.

Embraer says it "deeply regrets" the conduct of its employees and agents who paid bribes in multiple countries and created false records to conceal the payments.

Confidence in the Brazilian economy has rebounded since left-leaning President Dilma Rousseff was impeached in August and replaced by former Vice President Michel Temer, who is viewed as pro-business. And investors appear to believe that authorities have at least identified all the parties likely to be involved in the corruption purge.

But for Brazil, kick-starting economic growth could prove a tall order without help from its biggest companies, which have long played an outsize role in driving investment. In 2013, Petrobras alone accounted for almost 10% of total investment in the Brazilian economy. As it slashed spending in subsequent years to stem its soaring debt, Brazil's gross fixed investment dwindled for 10 consecutive quarters, deepening the recession.

Such carnage has ominous implications. The country's pervasive red tape, a labor code that dates to the 1930s, and a Byzantine tax system create formidable barriers to entry for outsiders or startups that can't afford to employ armies of lawyers and accountants. And double-digit interest rates make capital too costly for companies without the reach to issue debt overseas.

Brazil's corporate giants have left the banking system saddled with bad debt. Nobody knows the full extent of the problem, but Credit Suisse said in September pegged the "troubled" debt of the country's big companies at an unprecedented 818 billion reais. The total doesn't include Petrobras's 398-billion-real debt pile.

Marcelo Telles, who wrote the Credit Suisse report, says Brazilian companies will likely take several years to pare their debt, assuming the economy rebounds. If they fail, Brazil could face a credit crunch, he said.

To avoid the worst, "the economy needs to grow next year," Mr. Telles said. "We need to take this very seriously."

 

(END) Dow Jones Newswires

December 13, 2016 08:25 ET (13:25 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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