Brazil: Analysts dispel rumours of downgrade


Matthew Turner
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The decision by Standard and Poor’s (S&P) to lower Brazil’s BBB credit outlook to negative sends a warning signal to the government but should not materialise in a downgrade, claim analysts

Analysts participating in the ECR survey observed a steep decline in Brazil’s macroeconomic stability in the months leading up to the country being put on negative outlook from Standard and Poor’s last week, as high inflation and sharply slowing economic growth affected its country risk score.

Brazil is rated BBB with a stable outlook by Fitch and Baa2 with a positive outlook by Moody’s. This places S&P’s BBB rating with a negative outlook against the consensus of the other two agencies.

The rating agency cited weak growth reflecting modest export performance and “ambiguous policy signals” from the government that dampened investor confidence as the key reasons behind its action.

And ECR analysts appear to agree: Brazil’s economic assessment score fell by 0.5 points in the first quarter of 2013 to 61.9 (out of 100), a cumulative fall of 2.5 points on an annual basis compared with last year.

The country’s economic assessment has declined since December after receiving worsening scores for bank stability (-0.1), monetary policy/currency stability (-0.1) and economic growth (-0.1).

The Brazilian economy slowed to 0.9% in 2012 – from 2.8% in 2011 – which was below the consensus forecast of 2.5% growth. The continued economic slowdown in China and an uncertain recovery in the US explain the country’s modest growth performance in 2012.

Brazil’s trade-to-GDP ratio stood at 23.6% in 2012, which is below the 53.7% target rate espoused by José Guilherme Reis, lead trade economist at the World Bank.

The country’s investment rate fell to 18% of GDP, compared with the 22% to 23% rate the economy needs to sustain higher growth, according to a report by the FT.

Monetary policy tightening had a negative bearing on the country’s economic assessment, according to Brazil’s Q1 performance.
With inflation peaking at 5.8% in Brazil in April and breaching the upper bound of the Central Bank of Brazil’s 4.5% target range, analysts are concerned about an aggressive monetary-tightening cycle during the coming months, despite political pressure for lower rates to nurture an economic recovery.

The central bank raised the benchmark Selic rate by 50 basis points to 8% at the end of last month. The recent hikes suggest that “policymakers are now attaching more importance to tackling above-target inflation than they are to supporting the economic recovery”, states a report by Capital Economics.

References to the weakness of overall economic growth were omitted from the central bank’s last meeting and a greater emphasis was placed on the upside risks to inflation, suggesting that inflation-targeting will remain a priority for the next few months at least, notes Capital Economics.

Brazil’s monetary policy and currency stability indicator declined by 0.1 points last quarter, reflecting the central bank’s laggard policy response, while banking-sector strength weakened by 0.1 points.

Marijke Zewuster, head of emerging markets research at ABN Amro, says: “The rating action taken by S&P is more a warning signal to the government that it must implement a more coherent economic policy.

“There is not a clear sign that the central bank or government will change course. If the central bank tightens monetary policy, you will probably see a loosening on the fiscal side, but I don’t think that will be enough to trigger a downgrade.”

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