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Expect More Downgrades For Brazil


Shares of the iShares MSCI Brazil Capped ETF (EWZ) , the largest ETF that follows Brazilian equities, traded slightly lower Monday though that might be seen as something of a surprise against the backdrop of one of the major ratings agencies saying more downgrades could be in Brazil’s future.

In September, Standard & Poor’s downgraded Brazil’s sovereign credit rating to junk status, becoming the first major ratings agency to do so. Even after the retreat, Brazilian stocks may have further to fall as the economic contract worsens.

“What started as a recession driven by the adjustment needs of an economy that accumulated large macro imbalances is now mutating into an outright economic depression given the deep contraction of domestic demand,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said, according to Bloomberg.

Brazil’s gross domestic product declined a record 4.5% year-over-year in the third quarter, or on pace for its worst recession since the 1930s, reports Joe Leahy for the Financial Times.

Brazil’s economy shrunk 1.7% in the three months ended September against a revised second quarter, worse than analysts’ expectations.

“It’s been a record number of corporate credit downgrades for Brazil this year, but 2016 could see a 10:1 ratio of cuts to upgrades next year, says Fitch, especially if the sovereign itself is downgraded,” according to a Seeking Alpha brief. “The agency currently has a negative outlook on Brazil and on the grades of more than half of the Brazilian companies it rates. The current grade for Brazil is BBB-, the lowest investment-grade level. S&P has already downgraded the country to junk status.”

In February, Moody’s downgraded debt issued by Petrobras (PBR) to Ba2, two levels below investment grade, stoking speculation regarding Brazil’s sovereign credit rating.

Multiple factors are dragging on the Brazilian economy. Unemployment rose to 7.9% in September from 4.7% in October last year. Inflation has jumped over 10% for the first time since 2002. The budget deficit has widened to 9.5% of GDP. Additionally, lower commodity prices, diminishing consumer credit boom and a corruption scandal at state-run oil giant Petroleo Brasileiro have all weighed on the economy. [Corruption Probe Plagues Brazil ETF]

Brazil’s real is in a wicked slump against against the dollar and resides at multi-year lows against the greenback. The real could face increasing pressure as global investors price in the rising odds of additional credit downgrades for Brazil. [Bad News for Brazil ETFs]

iShares MSCI Brazil Capped ETF


The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.