Moody’s Assesses Brazil’s Outlook after Rousseff Victory

The re-election of Brazil’s president Dilma Rousseff on 26 October has important implications for the country’s Baa2 sovereign rating, as well as for the credit quality of Brazilian banks, corporations and securitisations, says Moody’s Investors Service.

In the report that summarises this impact, entitled
‘Brazil: Rousseff’s Choices Loom Large for Brazil, Banks, Corporates and Securitisations’
, the credit ratings agency (CRA) says the narrow margin of Rousseff’s victory underscores the challenges she faces as she looks to revive Brazil’s lackluster economic performance.

The report is being issued as the Banco Central do Brasil raises its benchmark Selic rate by 25 basis points to 11.25%, its highest level in three years and surprising analysts who were not expecting any change.

Moody’s notes that the split in the polls illustrates the increasing polarisation of Brazil’s electorate, which has significant implications for policy formulation over the next four years. On the one hand, Rousseff’s supporters in her Partido dos Trabalhadore (PT) party – aka the Workers’ Party – tend to favour continuity, with particular emphasis on social welfare programmes.

On the other hand, she will need to regain the confidence of investors, both to head off any further reduction in government debt affordability and, more generally, to promote private-sector investment and medium-term growth.

For banks, the impact will hinge on the role that public lenders play over the next four years. Efforts by the Rousseff administration to strengthen economic growth, combat inflation and boost business confidence will likely entail a fiscal and monetary rebalancing that could have material implications for the loan books and profits of the country’s public and private banks.

Among Brazilian corporates, a continuation of the downdraft in the Brazilian real (BRL) that has followed the election would be positive for some exporting sectors such as pulp and paper, mining and protein. But tighter fiscal policy could lead to higher corporate tax rates and a reduction of corporate subsidies and incentives, which would affect many sectors, says Moody’s.

Fiscal and monetary policy adjustments to stimulate the economy could weaken the credit quality of underlying assets in Brazilian securitisations and hurt their performance, the CRA adds.

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