Macroscope | S&P too optimistic on Brazil’s creditworthiness

Assessments of countries’ creditworthiness can prove controversial, particularly when undertaken by rating agencies whose methodologies have been under intense scrutiny since the global financial crisis erupted in 2008.

While the agencies focus on a range of quantitative and qualitative factors in gauging the creditworthiness of sovereigns, their views are often sharply at odds with those of investors. Indeed markets invariably ignore changes in credit ratings on the grounds that they reveal little new information about countries.

The latest example of how agencies’ opinions can fly in the face of investor sentiment and raise serious questions about the judgment of the analysts in question is the decision on Monday by Standard & Poor’s (S&P), one of the main agencies, to spare Brazil the humiliation of being stripped of its prized investment-grade status.

S&P announced that it was affirming Brazil’s rating of just one notch above speculative grade, or “junk”.

Given the feverish speculation over the past several months about whether Brazil, Latin America’s largest economy and one of the most actively traded emerging markets (EMs), would be junked, the rationale for S&P’s decision is worth commenting on.

Brazil is currently knee-deep in a political, economic and financial crisis which is being exacerbated by an escalating corruption scandal centred around the country’s state-controlled oil company, Petrobras, which is accused of running a skimming operation in which some US$10 billion was embezzled from the firm during the years when Dilma Rousseff, Brazil’s recently re-elected president, chaired the company’s board.

Although Rousseff denies any involvement in the scheme, Brazilian voters - not least those who backed her in October’s election - are enraged, with 1 million protestors taking to the streets earlier this month to denounce corruption and call for her government’s resignation. The whiff of impeachment is in the air.

Investors are rapidly losing confidence in Brazil. Since the beginning of this year, Brazilian equities have fallen 14 per cent (and by nearly 10 per cent this month alone), compared with a 2.3 per cent rise in EM stocks. The real, Brazil’s currency, has dropped a staggering 22 per cent against the US dollar since the end of January while the yield on the country’s 10-year local bonds has shot up 150 basis points since mid-January to 13.2 per cent.