S&P revises Brazil ratings outlook to negative
Reuters, Thursday, September 10, 1998 at 11:36
(Press release provided by Standard & Poor's)
NEW YORK, Sept 10 - Standard & Poor's today affirmed its
double-'B'-minus rating on the Federative Republic of Brazil's
US$58 billion of long-term senior unsecured foreign currency
debt and its double-'B'-plus/single-'B' ratings on the
Republic's R296 billion (US$254 billion) of long- and
short-term real-denominated debt.
Additionally, Standard & Poor's affirmed its
double-'B'-minus long-term foreign currency and its
double-'B'-plus long-term local currency sovereign credit
ratings on the Republic.
The rating outlook has been revised to negative.
The negative outlook indicates that if current negative
trends continue, the ratings could potentially be revised
downward over a one to three year time horizon.
At the same time, Standard & Poor's affirmed its
double-'B'-minus counterparty credit rating on Banco Nacional
de Desenvolvimento Economico e Social (BNDES), its
double-'B'-minus rating on the bank's US$3.2 billion of
long-term foreign currency debt, and its double-'B'-plus local
currency counterparty credit rating on the bank.
Also, Standard & Poor's affirmed its double-'B'-minus
counterparty credit rating on Banco do Nordeste do Brasil S.A.
(BNB), its double-'B'-minus rating on the bank's US$340 million
of long-term foreign currency debt, and its double-'B'-plus
local currency counterparty credit rating on BNB.
The rating outlooks are also revised to negative.
The negative outlook reflects the risks to financial
stability posed by a public sector deficit equal to about 7% of
GDP in the face of tightening global market conditions.
Four years into the Real Plan, the failure to
significantly reduce fiscal imbalances -- notwithstanding
structural adjustment at the state level and a very successful
privatization program -- has left governmental and external
finances significantly more exposed to shifts in market
confidence than is the case with all other Latin sovereigns
except Venezuela (single-'B'-plus), and could ultimately
jeopardize exchange rate policy continuity.
Accelerating capital outflows prompted the Central Bank to
hike interest rates to 29.75% effective September 8, which
will add R2 billion per month to the fiscal deficit.
That will be offset only partially by budget cuts also
announced September 8.
Those measures may be more effective overall than last
November's spending cuts because they also target the fiscal
bottom line -- a 1998 federal primary surplus of R5 billion.
Also, they should strengthen significantly the budget
implementation capacity of the Finance Ministry.
Nevertheless, the negative outlook reflects Standard &
Poor's view thatthose measures may be insufficient to
stabilize market expectations and, in turn, external finances.
While the government is expected to announce its
medium-term fiscal adjustment program by November 15, and to
take emergency steps in the interim if necessary, now even this
delay will be costly in terms of both credibility and finances.
As Brazil's external flexibility diminishes,
creditworthiness could deteriorate further and a ratings
downgrade could result unless a comprehensive, credible, and
timely fiscal package is implemented.
The ratings are constrained by:
-- Profound structural flaws in federal and state finances,
most notably a bankrupt social security system, archaic tax
code, and inefficient health care system.
Resulting deficits, coupled with the ongoing regularization
of previously undocumented debt, have driven gross central
government debt to about 48% of GDP.
About 70% of R300 billion in domestic debt is now indexed
to overnight interest rates, compared with about 11% in May;
the average maturity is about 8 months, with an average R10
billion per week coming due in the next two months.
Although the comparatively large domestic capital market
normally absorbs massive rollovers more easily than in most
similarly rated countries -- with pension and mutual funds that
are required to hold real-denominated debt accounting for well
over half of outstandings and the public sector also holding a
significant share -- the debt structure is risky.
-- The limitations of monetary policy as the key instrument
supporting exchange rate policy.
The recent linkage of domestic debt to overnight interest
rates further complicates monetary policy, effectively
requiring fiscal measures to make credible any shift in
policy. In addition, high real interest rates threaten the
private banking system's weak asset quality -- with an
estimated 10% of total loans now nonperforming -- and dampen
economic activity.
-- Significant balance of payments vulnerabilities.
Although down to about US$56 billion now, foreign exchange
reserves still cover an estimated 133% of short-term external
debt and about 60% of the total 1998 external financing gap
(current account deficit plus long-term amortizations plus
short-term debt), adequate coverage compared with similarly
rated sovereigns.
Foreign direct investment should finance about two-thirds
of the current account deficit, expected at 3.6% of GDP this
year.
However, the increasing pace and changing composition of
capital outflows in recent weeks point to potentially
increasing pressures on the real.
A surge in outflows through the floating exchange market
indicates that a broader cross-section of Brazilian economic
agents are now transferring funds abroad.
If last week's interest rate increase does not slow this
trend, further measures will be required in the short term to
support exchange rate policy.
Medium term, growing maturities of private nonfinancial
sector long-term external debt -- which has tripled in the
past three years to US$108 billion -- will also pressure the
capital account, if external market conditions remain tight.
The ratings are supported by:
-- A massive privatization program. Revenues of US$17
billion last year and an expected US$28 billion this year
provide a financial bridge to fiscal consolidation and
long-term balance of payments sustainability.
Total multiyear privatization revenues of more than 10% of
GDP will reduce the stock of domestic debt by almost as much.
Moreover, privatization and ongoing deregulation should improve
economic efficiency, strengthen long-term export prospects,
and -- as occurred in Argentina -- gradually help offset the
accumulated real effective appreciation of the currency.
-- Effective monetary management relative to most
speculative-grade sovereigns.
The central bank's de facto autonomy and commitment to
policy continuity -- demonstrated again by last week's
interest rate hike -- favorably distinguishes Brazil from
similarly rated sovereigns.
Despite four years of substantial fiscal imbalances,
monetary policy has driven inflation from quadruple digits to
less than 2% this year.
-- Public support for the Real Plan -- rooted in broadly
rising real incomes and the achievement of relative price
stability.
Next month's elections have reduced -- though not
eliminated -- the policy flexibility this support has allowed
the fiscal and monetary authorities.
-- A strong and relatively liquid corporate sector compared
with most speculative-grade sovereigns.
The exposure of the corporate sector to potential interest
rate and exchange rate fluctuations is somewhat mitigated by
its strong export base, relatively low leverage, and prospects
for continuing productivity gains.
OUTLOOK: NEGATIVE
The outlook indicates that if current negative trends
continue, the ratings could potentially be revised downward
over a one to three year time horizon, Standard & Poor's said.
Copyright 1998, Reuters News Service |
