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Brazil: Downgrade points to continued underperformance - BBH

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 16, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Córdoba) - Today Fitch rating downgraded Brazil’s credit rating below the investment grade. According to analysts from Brown Brother Harriman, Brazil assets will continue to underperform.

    Key Quotes:


    “Today’s Fitch downgrade is a stark reminder that Brazil continues to suffer from a toxic mix of high inflation, recession, low commodity prices, and heightened political uncertainty. Because we see no end in sight for these negative factors, we believe Brazil assets will continue to underperform.

    The economy remains in recession. GDP growth is forecast to contract -3% in 2015 and -1% in 2016, with growth not seen until 2017. For 2014, GDP was basically flat. With commodity prices still falling and more policy tightening ahead, we think the risks are to the downside with regards to these growth forecasts.”

    Yet price pressures are still rising, with IPCA inflation of 10.48% y/y in November. This is the highest rate since November 2003, and well above the 2.5-6.5% target range.”

    “There is a growing debate in the market over whether Brazil will resume its tightening cycle. The central bank has been on hold since July, when it hiked the policy rate by 50 bp to 14.25% and signaled an end to the cycle. Since then, price pressures have continued to rise. We believe COPOM will resume tightening with a 50 bp hike at the next meeting on January 20. “

    “Fiscal policy remains a key concern. The primary deficit was -0.7% of GDP in November, while the nominal deficit was a whopping -9.5% of GDP. This is the highest since at least 1998. Revenues have been hurt by the slowdown, while congress has been slow to pass spending cuts proposed by Rousseff.”

    “Fitch just joined S&P in cutting Brazil to sub-investment grade BB+ with a negative outlook. Many investors can only invest in countries that have at least 2 out of 3 agencies at investment grade.”

    “BRL had held up fairly well recently, but we think this downgrade will keep a lot of selling pressure on it. It is still the worst performing currency in EM overall at -33% vs. USD. The next worse is COP at -28%.”
    “With inflation likely to remain high and the central bank likely to resume hiking, we think Brazilian bonds will continue to underperform.
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