Brazil: Risk Assessment
Country Risk Rating
|C||A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high.|
Business Climate Rating
|A4||The business environment is acceptable. Corporate financial information is sometimes neither readily available nor sufficiently reliable. Debt collection is not always efficient and the institutional framework has shortcomings. Intercompany transactions may thus run into appreciable difficulties in the acceptable but occasionally unstable environments rated A4.|
Recession is expected to continue in 2016
Despite a moderation of GDP contraction in the first quarter 2016 compared to the previous quarters, the outlook for the Brazilian economy seems grim. Internally, household consumption, the main growth driver, should still suffer from the high cost of credit, lower real wages due to the still high inflation and the rise in unemployment rate (around 11% in April 2016).
The rise in unemployment also affects the bank credit supply: the banking sector, exposed to household debt, is expected to face an increase in non-performing loans which contributes to reduce the supply of credit. Private and public investment should continue to contract due to the weakness of domestic demand and the pursuit of a fiscal austerity policy. Foreign trade would be affected by the slowdown in Chinese demand and its impact on prices of minerals. Export competitiveness should still be affected by weak transport infrastructure and rigid labor regulations, despite the gains related to the continued depreciation of the real against the dollar. Finally, inflation should decline in line with the weakness of domestic demand. It should nevertheless remain above the target set by the central bank (4.5%) due to the depreciation of the Brazilian currency. Rising unemployment and slowing consumer prices should lead to the easing of monetary policy towards the end of 2016.
A primary deficit higher than expected in 2016
The adjustments to fiscal policy begun in 2015, shortly after the re-election of President Dilma Rousseff, are having trouble achieving their aims: inflation and public deficit have continued to rise. The lack of a majority in Congress and the recession have impacted the adjustment in public finances, which in turn led to the decision by three rating agencies to downgrade the country to speculative grade.
The new interim government that took office in May 2016 has already announced a higher than expected primary deficit estimated at nearly 72 billion BRL, or 2.8% of GDP. This increase is explained mainly by the lower tax revenues expected during this year, but also by the release of deferred payments under various programs funded by the federal state. The new government is now working on a fiscal adjustment plan that should be subject to the approval of Congress before next summer. Proposals such as the reform of the social security system or the tax increases are considered. A widening budget deficit should result in worrying public debt dynamic which could reach 73.4% of GDP in 2016 from 66.5% of GDP in 2015 according to the government.
Improvement in the current account deficit driven by lower imports
In 2016, the current account deficit is expected to improve thanks to weaker imports on the back of slower private consumption and investment, as well as the depreciation of the Brazilian real which made imports more costly. On the other hand, depreciation of the local currency would also help to boost export competitiveness but exports will continue to be hit by low commodity prices. Trade in services and income balance (tourism. dividends. interest) will also remain in deficit.
The challenges of the Michel Temer’s new administration
In May 2016, Brazilian Senate voted in favor of the opening of the impeachment’s proceedings against the President Dilma Roussef with 55 votes in favor, 14 more votes than the majority required. This is her Vice President Michel Temer, which now assumes the role of interim president, while waiting the final decision of the Senate that should be held in August 2016. Barring unforeseen circumstances, two thirds of the votes in the Senate necessary for revoking definitely the President should be achieved. Michel Temer is expected to remain in power until the next elections in 2018, but he will face to several challenges, including ensuring political stability due to his lack of legitimacy (he was not elected democratically). The success of his government will mainly depend on its ability to pass economic reforms to bring the country out of the crisis and to restore credibility.