Brazil’s Rooted Ratings Razz
Brazilian shares continued a 15 percent slump through mid-November as the sovereign paid a premium on an external debt liability management operation with a yield over 4 percent as ratings agencies telegraphed further downgrades ahead of elections a year away. A demotion from S&P would teeter on junk territory as Moody’s also revised the outlook to stable on a 2 percent drop in investment/GDP to 18 percent and low growth under the historical 3 percent average cited by the IMF. World Cup spending in 2014 could bring a result in that range, but inflation is running at near double the pace as the real resumed a 10 percent fall against the dollar despite central bank extension of its swap program from $375 billion in reserves. Public debt/output is at 60 percent, 15 percent above the peer-rated group, as the government continues to shovel money through state banks for consumption, exports and infrastructure with the budget coming in at half the traditional 3 percent primary surplus. Tighter monetary policy, with the benchmark rate toward 10 percent, has advanced without actual independence as attempted in a Senate bill to grant central bank directors fixed terms. The President’s personal approval number rebounded to 60 percent, with the ruling Workers Party still with a commanding lead for next year’s poll as an opposition alliance involving previous environmental activist contender Silva has yet to acquire definition. Political analysts predict the margin will shrink once campaigning officially begins and an economic cabinet reshuffling could also be ahead within the context of policy continuity. Finance Minister Mantega, reacting to recent OECD and private bank criticism, vowed to reduce BNDES development lending 20 percent in the near term without offering specific as the public share of outstanding credit remains at 50 percent. The cutback was in contrast to breakneck 25 percent annual expansion in real estate borrowing through the Caixa Federal, as the IMF warned of “property price correction worsening asset quality” in its Article IV checkup.
According to Moody’s Brazilian homebuilder leverage exceeds Mexican counterparts that already defaulted on obligations earlier this year and housing values are up an average 200 percent since 2008 in Rio and Sao Paulo by industry calculations. Mortgages are only 7 percent of GDP, but rising household debt service has resulted in a wave of contract cancellations. More than two dozen international corporate issues are on negative ratings watch, as the Batista OGX bankruptcy in commodities and shipping is the region’s largest with foreign bondholders organizing for court battle under the byzantine insolvency law. They have already been pre-empted by government creditors in the Group Rede utility firm workout, and FDI reticence was underscored by the lone bidding consortium for Petrobras’ landmark pre-salt offshore auction as the giant already owes $185 billion and must contend with constant rule changes no available derivatives hedge can cover.
