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 to last into 2016
Slipping into recession in 2015, the country has few chances of seeing the beginnings of a recovery in 2016. Indeed, the outlook for the economy is less than encouraging due to an unfavorable internal and external environment for growth. Internally, household consumption, the main growth driver, is expected to continue to suffer from the high cost of credit and lower real wages due to the high level of inflation. The banking sector, exposed to household indebtedness, will effectively be forced to restrict the credit supply because of the expected increase of non-performing loans linked to the rise in unemployment (high level of unemployment around 9% in 2015), which is also likely to hamper the recovery in consumption. The repercussions of the Petrobras scandal and the company's announced cuts to its 2015-2019 investment program continue to discourage investment and activity by related businesses, especially in building works because of the involvement in the scandal of large groups in the construction industry. The industry is likely to continue to suffer from the lack of infrastructures and skilled labor, which is reflected by costs that are rising faster than productivity.
External trade is likely to remain affected by the slowdown in Chinese demand and its impact on price of minerals. Export competitiveness is set to suffer from weak transport infrastructures and rigid labor laws, despite the gains linked to the ongoing depreciation of the real against the dollar.
Finally, inflation is set to fall with less pressure on prices thanks to the advancement of the reduction of the gap between the administered prices (fuels and energy) and the market prices in 2015 and weak domestic demand. It is, however, likely to remain above the target set by the central bank (4.5%), given the depreciation of the Brazilian currency. Ongoing high inflation would, meanwhile, limit the prospects of a cut in the benchmark SELIC interest rate during 2016.
Worsening budget situation set to continue
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 the public deficit have continued to rise. The lack of a majority in Congress and the recession in which the country still finds itself have impacted on the adjustment in the public finances, which in turn led to the decision by two of the rating agencies to downgrade the country to speculative. In 2016, the objective of re-establishing equilibrium in the public finances, in particular involving the return to a primary surplus already appears in jeopardy given the successive downward revisions of the budgetary targets. Despite the expected rise in exceptional income, thanks notably to the sale of assets (hydroelectric power stations, land, buildings) and additional budget cuts (including social spending), the weakness of activity is likely to continue to hamper revenue collection. The introduction of new taxes and duties, along with the gradual reintroduction of the financial transactions tax (CPMF), considered essential for achieving the fiscal objective in the medium term, is struggling to gain approval in Congress. A widening budget deficit would result in an alarming public debt dynamic.
Improvement in the current account deficit driven by lower imports
In 2015, the current account deficit improved, thanks notably 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 expensive. This trend is set to continue in 2016: the economy's weakness is likely to dampen demand for imported goods, which will partially offset the fall in exports of commodities (iron ore, soya beans and sugar, in particular) and the slowdown in Chinese demand. Depreciation of the local currency would also help 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, while the current account deficit should be covered in part by foreign direct investments, which represented about 2.6% of GDP in 2014, excluding reinvestments.
Government losing momentum and weakened by the recession and the lack of political support
President Dilma Rousseff's position remains precarious. Her image has continued to worsen since she was re-elected in October 2014. Tainted by the Petrobras corruption scandal, the president faces growing popular discontent and weak support from the political class, including from within her own party. The government is struggling to meet the demands of the middle-class, exasperated by corruption and by declining purchasing power.
Inflation, still high, associated with rising unemployment levels, could moreover foment social unrest and increase pressure on the President to step down in 2016. This risk will be increased if the impeachment process against her is effectively implemented.