Back on September 9, S&P threw Brazil [13] in the junk bin.
“We anticipate that within the next year [another] downgrade could stem in particular from a further deterioration of Brazil's fiscal position, or from potential key policy reversals given the fluid political dynamics, including a further lack of cohesion within the cabinet,” the ratings agency noted, explaining its negative outlook. “A downgrade could also result from greater economic turmoil than we currently expect either due to governability issues or the weakened external environment.”
Suffice to say that the political “dynamics” have not become more favorable despite some observers’ contention that the further we move down the road to a Rousseff impeachment, the happier the market will be given her track record. House Speaker Eduardo Cunha faces an investigation by the ethics committee in connection with his alleged role in the Carwash scandal while the relationship between Rousseff and VP Michel Temer looks increasingly tenuous. Meanwhile, the arrest of Delcidio Amaral seemed to have ushered in a new era wherein sitting lawmakers aren’t above the law and may be too busy looking over their shoulders going forward to legislate. All of this casts considerable doubt on the country’s ability to overcome fractious politics on the way to adopting some semblance of fiscal rectitude.
As for “economic turmoil,” well, Brazil has effectively descended into a depression since S&P’s downgrade. GDP is collapsing, inflation is sitting at 10.5%, a 12-year high, and unemployment is soaring. Everything that could possibly go wrong economically is going wrong and thanks to rising prices and the incipient threat of lagged FX pass through, Copom is powerless to adopt counter-cyclical policies and will in fact be forced to hike in January.
Against this backdrop, Moody’s put the country’s investment grade rating on review Wednesday, suggesting it may not be long before Brazil gets junked again (don’t worry, Cunha says it’s priced in).
For those wondering how long it will be before the “B” in BRICS gets junked by everyone, look no further than the following slides from Credit Suisse who notes that “the continuation of unfavorable fiscal balances, prolonged recession, high inflation, and continued rise in public debt as a percentage of GDP are compatible with the expectation of additional downgrades in 2016 and 2017.”
[14]
[15]
[16]
[17]
And it's not just the sovereign. Brazilian corporates are in trouble as well. As Bloomberg reports [18], "Fitch Ratings estimates it may slash the ratings of as many as 10 companies for every one it upgrades in 2016." Here's more:
Fitch has a negative outlook on Brazil and on the grades of more than half of the Brazilian companies it rates. Its BBB- ranking for sovereign bonds is the lowest possible investment grade. Standard & Poor’s cut the country to junk in September.
Brazilian companies have accounted for 11 of 15 bond defaults in Latin America this year as a widening bribery probe into Petroleo Brasileiro SA roils the nation’s construction and banking industries.
Rising yields threaten to make it harder for Brazil’s debt-laden businesses to refinance obligations as $30 billion of overseas bonds come due in the next two years.
Needless to say, if the BRL continues to weaken in the face of still depressed commodity prices and a worsening political situation, it will become more and more difficult for Brazilian corporates that have borrowed in dollars to service their debt. Don't forget, Brazil has some $89 billion in USD bonds trading above 9% (a large chunk is Petrobras paper). Here's the full breakdown: Petrobras (USD37bn), USD20bn of industrials, USD15bn of banks (mostly subordinated), USD6bn of rigs, USD3bn of royalty-backed bonds and USD8bn of other sectors.
We'll close with two tables. One from Deutsche Bank and one from the BIS. The first gives you an idea of what Brazil is facing in terms of USD bond maturities going forward and the second shows you the aggregate burden.
[19]
