Brazil’s sovereign downgrade to junk status is part of a trend that will make it tougher for Latin America to attract portfolio investment, investors said at a conference hosted by EMTA last week.
“The fact that EM is trending back toward a high yield index is a very significant event, because we have been selling the story with two keys themes,” said Jonathan Prin, a managing director and head of research at Greylock Capital Management.
“First of all, that the sovereigns are improving and giving corporates more room to grow. Secondly, there would be a diversity of investors that would make a more stable funding base to finance that growth.
“Both those things, partially indicated by the Brazil downgrade, are now being threatened.”
Across LatAm, returns on corporate and sovereign bonds have started falling compared to a year ago, according to Bank of America-Merrill data (see chart).
Panelists at the EMTA conference, a day after Standard & Poor’s cut Brazil’s sovereign rating to BB+, sub-investment grade, said further downgrades loomed.
Sarah Leshner Carvalho, a research director at Barclays, said the bank expected Fitch to downgrade the sovereign by the end of the year and Moody’s, early next year. Moody’s and Fitch rate Brazil Baa3 and BBB, respectively.
The potential downgrades follow a year of depressed economic activity and scandal. Economists forecast that Brazil’s economy will contract by 2.55%, according to a survey published by the Brazilian central bank. The figure is up from 2.44% a week earlier and 2.01% a month ago.
At the same time, Brazilians’ perceptions of the country’s future have crashed since five years ago, when Dilma Rousseff was elected president. Only 21% of Brazilians think optimistically about the country´s future, compared to more than 70% in March 2010, according to a survey by the Brazilian Institute of Public Opinion and Statistics, Ibope.
Brazil, once a shining star for EM investors, could now lead Latin America back to the high-yield world.
Around $80bn worth of foreign-currency debt from Brazil, equal to 85% of the cross-border bonds from the country, could become high-yield, said Anne Milne, head of global emerging markets corporate credit research at Bank of America-Merrill Lynch.
If those credits fell into sub-investment grade, it would leave just 40% of LatAm corporates investment grade, she said. Currently 53% of LatAm issuers are high-grade. LF