Where are the opportunities for investors in devalued Brazil ?
By Frans van Hees | www.AboutBrasil.com | Week 40, October 2015
Sao Paulo — Recently,
S&P downgraded the long-term foreign debt of Brazil to high yield BB +, with a negative outlook there. It underlines the decline of Brazil, the former darling among
emerging markets, writes Javier Murcio, Director of emerging markets at Standish, a boutique of BNY Mellon.
The rating agency's conclusion is based on the deterioration of the financial situation and the political inability to implement
reforms in Brazil.
According to Mr Murcio Brazil is in a recession. He provides the real GDP will decrease by 2.3% in 2015 and by 0.5% in 2016, while inflation is high with 9%. Like S&P, Standish sees no short-term improvements in the Brazilian economy.
Mr Murcio sees several consequences of lower credit assessment.
Is President Rousseff able to turn the economic tide?
The downgrade undermines the already fragile confidence and deepen the recession. This puts greater pressure on government revenues.
Also in the short term the focus shifts towards corporate and semi-government, as higher interest rates increase the pressure on the debt-laden companies and make new financing more expensive in Brazil.
Standish also takes into account more political noise, since the premature departure of president Dilma Rousseff is getting more likely, due to voluntary departure or impeachment.
Nevertheless, Standish certainly sees
solutions to the economic problems in Brazil, but these will go further than proposed by the politicians.
The current proposals of the Minister of Finance achieve no real turnaround, according to Mr Murcio.
The tax measures are the wrong solution and too marginal to make a difference as well. Because of the lack of political willingness in Brazil, it is difficult to implement reforms. The downgrade might put extra pressure on the politicians.
Mr Murcio also highlights strengths of Brazil. The country has ample foreign reserves, manageable debt in foreign currencies, a strong legal system and good access to capital markets. The balances in the country are still relatively favorable.
For investors in emerging markets Mr Murcio sees attractive opportunities in the BB range, although it is too early for a purchase recommendation.