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Capital Markets

Rating Brazil

China has done it. Shouldn’t Brazil follow suit and create its own rating agency?

That’s the conclusion of Jerome Booth, co-founder and head of research at UK firm Ashmore Investment Management, who went on to tell the annual LatinFinance Investors Forum in São Paulo that the three large rating agencies don’t accurately reflect Brazilian risk. He says the big three persist in giving higher ratings to the “core countries” based on nothing other than “pure prejudice”.

Any new Brazilian rating agency would certainly be busy. Antonio Oliveira, SVP of debt capital markets in Brazil for HSBC, said that 350 new corporates accessed Brazil’s local debenture market this year. The international markets – which provide potential longer-term and lower-rate debt to Brazilian companies (albeit largely dollar-denominated) – are all but closed to non-investment grade firms. Booth implied many more Brazilian corporates would be rated higher if the agencies had a less biased view of Brazilian public and private sector risk.

Meanwhile Booth holds a gloomy outlook for the US and Europe, arguing that the flow of assets to Brazil and Latin America will pick up in the coming years. “Economists are in private – if not yet publically – discussing the real possibility of depression in the US,” said Booth – himself a professional economist. He said most economists viewed the likelihood of a US depression at between 5% and 25%. He believes “there is about a 20% chance of depression in the US”.

Booth argued that the deleveraging now taking place in US banks compares with the 1930s in scale and that the depression that has accompanied this deleveraging, will have a secular impact on capital flows into the emerging markets.

Booth said financial investors should be taking their cues from the Great Depression for comparisons with the performance of US assets, one of which was that it took until 1954 for equity prices to recover. He also said that “the dollar needs to devalue by 30%” but would “probably overshoot that correction and fall by 50%” as central banks such as Brazil’s and China’s stop buying US treasuries in favour of building reserves of other global countries.

Booth’s argument is that if there is a one-in-four or one-in-five chance of depression in the US then the country’s safe-haven status is a mirage, whereas the relatively self-contained and resilient market of Brazil – with a medium-term growth trend of between 3% and 5% – is hugely attractive and is therefore likely to see more foreign investment.

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