Brazil junked by two out of three major rating agencies – Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 17, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at Nomura, notes that the Brazil was downgraded to junk by Fitch and the agency joins S&P in its BB+ credit rating – which includes a negative outlook – making Brazil officially non-investment grade according to two of the three major credit rating agencies.

    Key Quotes

    “Fitch’s downgrade came one day after the government announced its intention to revise down its 2016 primary fiscal target, from 0.7% of GDP to an interval of 0.0-0.5%, depending on possible deductions. This is not the first time Brazil lowered its fiscal commitment goal as the government’s ability and willingness to promote fiscal consolidation continue to wane.

    Roughly three months after S&P downgraded Brazil to junk category, it is now joined by Fitch, which also gave the sovereign a negative outlook. Brazil is now BB+ according to both S&P and Fitch, and Baa3 (with a review to downgrade) according to Moody’s.

    The fiscal situation at this point is widely known: debt levels have risen from 53.3% of GDP in 2013 to 66.1% currently. In the meantime, while the primary surplus necessary to stabilize debt/GDP is north of 3% of GDP (give that potential growth is likely on the lower side of 1-2% y/y), the government is likely to accumulate two consecutive years (2015 and 2016) of primary deficits. The combination of very low growth, primary deficits and high real interest rates should take debt/GDP to 80% by 2018 without meaningful changes to the fiscal stance.

    Additionally, the downgrade was a clear risk stemming from the launch of the impeachment process earlier this month, which has complicated the political landscape even more, decreasing the likelihood of meaningful fiscal adjustments in the next several months, in our view. The potential exit of Finance Minister Joaquim Levy – who, as disseminated in local press, is allegedly said to leave the government soon – symbolizes the ongoing deterioration of policy making (unless he is replaced with a fiscally conservative, market-friendly alternative, which was more likely in the past than it is now, in our view).”
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