It’s not as if the writing wasn’t on the wall, and don’t say we didn’t warn you.
Brazil, whose economy officially slid into recession in Q2 - a quarter during which Brazilians suffered through the worst inflation-growth outcome (i.e. stagflation) in over a decade - and whose efforts to plug a yawning budget gap are complicated by political infighting and a growing public outcry against embattled President Dilma Rousseff, has been cut to junk by S&P.
- BRAZIL CUT TO JUNK BY S&P; OUTLOOK NEGATIVE
Unsurprisingly, the iShares MSCI Brazil ETF is trading sharply lower AH on the announcement:
S&P’s move comes as the country’s finance minister fights for his political life and as deficits on both the current and fiscal accounts paint a bleak picture, especially in the face of persistently low commodity prices, China’s move to devalue the yuan, and the impossible dilemma facing the central bank which, like its “LA-5” counterparts, can’t hike to combat a plunging currency for fear of exacerbating FX pass through inflation and can’t cut to boost the economy for fear of jeopardizing the 2016 4.5% inflation target.
Expect this to get far, far worse before it gets better. Here’s the headline dump:
- S&P SEES BRAZIL REAL GDP CONTRACTION OF ABOUT 2.5% THIS YEAR
- S&P SEES BRAZIL REAL GDP CONTRACTION OF 0.5% IN '16
- S&P SEES BRAZIL REAL GDP MODEST GROWTH IN 2017
- BRAZIL GOVT DEFICIT TO RISE TO AVG 8% GDP IN '15, '16, S&P SAYS
- BRAZIL WON'T HAVE PRIMARY FISCAL SURPLUS IN '15, '16: S&P
Here's a look at the country's twin deficits:
Followed by a more granular look at the Brazilian nightmare:
And in the wake of the most recent GDP data and last week's confirmation of the budget blues, here's what Barclays had to say about the economy and the fiscal situation:
We now forecast a 3.2% fall of real GDP in Brazil in 2015, to be followed by a 1.5% contraction the next year. The downside surprise in Q2 and the deeper recession in the second half of this year also imply a negative contribution to next year’s growth. Household consumption should continue contributing negatively to headline growth, together with fixed asset investment.
The disappointment with fiscal execution, coupled with the lack of capacity of the government to negotiate structural changes in how expenditures grow, leads us to expect a fiscal primary deficit for this year and next of 0.3% and 0.5% of GDP, respectively. For 2015, the fiscal measures approved in Congress were reduced meaningfully from the original proposal and are contributing with only 0.53% of GDP to the fiscal balance. Even including those, we forecast total real fiscal revenues to fall 3.2%, as the growth slowdown is having the biggest negative contribution on this year’s result.
The implication is a downgrade in less than one year. We believe the rating agencies will take off the investment grade rating in H1 16, starting likely in April by S&P, given the increased pace of deterioration of the macroeconomic juncture and the disappointment relatively to the agencies’ forecasts. Moody’s could follow suit in the second half of the year, if it becomes clear that the country will fail to achieve real GDP growth and the primary surplus as percentage of GDP near 2%, as the agency expects for 2017. At this point, it is very hard to foresee any meaningful change in the political and/or economic scenario that could avoid such an outcome.
Finally, here's S&P with more color:
The negative outlook reflects our view that there is a greater than one–in–three likelihood that we could lower our ratings on Brazil again. We anticiapte that within the next year a 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. A downgrade could also result from greater economic turmoil than we currently expect either due to governability issues or the weakened external environment.
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