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Brazil is junk - TDS

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 25, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Analysts at TD Securities noted that Brazil has been mauled by Moody’s; and the market shrugged.

    Key Quotes:

    "Moody’s did the expected and finally became the third major rating agency to downgrade Brazil to junk status, with its decision to move Brazil to a Ba2 rating from a Baa3 rating. The ratings agency also affirmed the negative outlook, suggesting further steps down are likely. While this was a fairly well digested event by the market, that only led to temporary BRL weakness, the two-notch downgrade did send a strong message on the rate of deterioration in both the fiscal and political dimensions of the Brazilian economic landscape.

    There was less at stake with the downgrade given the previous two rating agencies had already bestowed junk status, though Finance Minister Barbosa suggested that this would not change the government’s plans to provide a fiscal consolidation effort and reform in the coming months. However, the possibility of something significant enough to stabilize debt-to-GDP dynamics within the next year is dubious. The two-notch downgrade builds in the expectation of further fiscal and political deterioration, and the statement by Moody’s suggested little possibility of a reversal, and indeed the negative outlook suggests that the risk of further downgrades remains high.

    We view Brazil as entrenched in a deep fiscal-political quagmire until the impeachment process can come to completion. This presumably would then allow the political process to turn towards issues of fiscal consolidation, a process that has been much hindered by the politicking and positioning due to the very uncertain political situation.

    With a deep GDP contraction of 3.5% expected this year, combined with the stress this will put on revenues, we believe the government’s desire to introduce flexibility to this year’s primary surplus goal of 0.5%, to allow as much as a 1% primary deficit, does not bode well for Brazilian assets and that upwards pressure on USD/BRL and yields should continue until a more thorough consolidation and fiscal reform is signalled."
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