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10 Sep 2015
Brazil: Expect more downgrades – BBH
FXStreet (Córdoba) - According to analysts from Brown Brothers Harriman the downgrade of the debt sovereign rate from Standard & Poor’s below the “investment grade” reflected current economic numbers and more downgrades appears to be totally justified.
Key Quotes:
“The reasons why Brazil was downgraded to sub-investment grade are clear, and don’t need further discussion beyond noting that the numbers are going to get much worse before they get better.”
“We just ran Brazil’s macro numbers in our sovereign rating model ahead of our usual quarterly update in October. Using the current readings and consensus forecasts, Brazil’s implied rating has fallen two notches to BB-/Ba3/BB-. While we had originally thought that S&P maintaining its negative outlook was perhaps a bit aggressive given our previous implied rating of BB+/Ba1/BB+, the new implied rating totally justifies more downgrades ahead.”
“Fitch's BBB for Brazil stands out as too generous and will have to be cut soon. Moody's recently cut Brazil a notch to Baa3 but inexplicably moved the outlook to stable; that should change too.”
“We see forced selling ahead when one of the other agencies pulls the trigger and cuts Brazil below investment grade too. It’s only a matter of time, in our view, and so Brazil bonds are likely to continue underperforming.”
“We look for continued BRL underperformance. With EM as an asset class likely to remain under pressure, the all-time high for USD/BRL near 4.00 from 2002 is likely to be broached soon. Due to the likelihood of overshooting, we see USD/BRL trading up to 4.50 over the next 3-6 months. BRL is the worst performer in EM YTD, at -31% and counting.”
Key Quotes:
“The reasons why Brazil was downgraded to sub-investment grade are clear, and don’t need further discussion beyond noting that the numbers are going to get much worse before they get better.”
“We just ran Brazil’s macro numbers in our sovereign rating model ahead of our usual quarterly update in October. Using the current readings and consensus forecasts, Brazil’s implied rating has fallen two notches to BB-/Ba3/BB-. While we had originally thought that S&P maintaining its negative outlook was perhaps a bit aggressive given our previous implied rating of BB+/Ba1/BB+, the new implied rating totally justifies more downgrades ahead.”
“Fitch's BBB for Brazil stands out as too generous and will have to be cut soon. Moody's recently cut Brazil a notch to Baa3 but inexplicably moved the outlook to stable; that should change too.”
“We see forced selling ahead when one of the other agencies pulls the trigger and cuts Brazil below investment grade too. It’s only a matter of time, in our view, and so Brazil bonds are likely to continue underperforming.”
“We look for continued BRL underperformance. With EM as an asset class likely to remain under pressure, the all-time high for USD/BRL near 4.00 from 2002 is likely to be broached soon. Due to the likelihood of overshooting, we see USD/BRL trading up to 4.50 over the next 3-6 months. BRL is the worst performer in EM YTD, at -31% and counting.”