Brazil’s Unimpeachable Whirlwind Witness
Brazil stocks and bonds were at the bottom of the MSCI and EMBI indices, with respective 40 percent and 15 percent losses into December, as street crowds joined beleaguered coalition party politicians in pressing initial impeachment stages against President Rousseff for budget accounting violations found by the government’s audit agency. She has not been directly implicated in the Petrobras Car Wash probe, with over 100 arrests tallied in the past two years including BTG Pactual investment bank founder Esteves, who resigned as chief executive as billions of dollars in assets were liquidated. The Supreme Court will rule on the removal procedure since the sole precedent two decades ago was for criminal bribery charges, and the appropriate timetable for possible vice presidential replacement with the next election due in 2018. The economy shrank 4.5 percent and investment 15 percent in Q3, as inflation and the budget deficit hit 10 percent. Public debt is at 65 percent of GDP without a near-term primary surplus, and private sector borrowing stands at 95 percent, according to Fitch Ratings which joined S&P in sovereign investment grade elimination. Non-residents control one-fifth of local government debt, and one-quarter of issuance matures in the next year. International reserves over $350 billion cover $75 billion in external obligations, but portfolio outflows were $3.5 billion in October and the current account deficit is stuck at 4 percent of output. Foreign direct investment has been flat and exports have picked up with currency depreciation toward 4/dollar but remain just 10 percent of the economy. Moody’s joined S&P in signaling imminent junk demotion on fiscal and governance “trend deterioration” and risk of outright “policy paralysis.”
Banks are now in line for downgrades, although the NPL level is just 3.5 percent, as deposits dropped at a $1 billion monthly rate and share prices over 50 percent. State mortgage giant Caixa slowed lines and the development bank BNDES reduced long-term credit one-third. Financial and corporate external dollar debt doubled since 2008 to over $250 billion, with a dozen defaults this year. The average cost is now almost 10 percent and $30 billion comes due the next two years with a 10/1 downgrade/upgrade imbalance predicted. Moody’s slashed Petrobras again in its latest move as management offered a stake in the offshore Libra field to meet repayments and sustain capital outlays.
In contrast Venezuelan bonds extended a 40 percent surge with the opposition’s thrashing of the ruling socialist party in parliamentary elections to win a clear majority. It will work for the release of jailed leaders and dismantling of pervasive exchange and price controls to reverse hyperinflation and severe recession, although the exact damage is unknown without official statistics. President Maduro accepted the result but claimed foreign conspiracy was a major factor, and he could be the target of an eventual recall effort after no-confidence votes are mounted against top officials for security and economic lapses. The victorious coalition represents a spectrum of individual and institutional interests but on foreign policy they may demand revision of Cuban ties. Balance sheet and operation cleanup is also a priority for the state oil monopoly, whose foreign suppliers now require pre-payment ahead of possible debt swaps following the partial Bolivarian revolution trade-in.
