19 de septiembre de 2014 / 19:44 / en 3 años

Brazil faces year of diminishing bond supply

NEW YORK, Sept 19 (IFR) - Bankers and investors are bracing for a painful year ahead for Brazil and one that is likely to see less primary issuance from Latin America’s largest economy in the wake of presidential elections in October.

The prospects that President Dilma Rousseff could lose the election next month has put a floor under Brazilian asset prices, but the sovereign’s fundamentals continue to deteriorate, making next year a period of adjustment for whichever candidate is chosen to govern the country.

Moody’s decision to put Brazil’s Baa2 rating on negative watch earlier this month only reinforced the gloom over Rousseff’s leadership of the economy.

“You look at every macro variable in Brazil and see signs of deterioration,” said Marco Santamaria, a global fixed-income portfolio manager at Alliance Bernstein. “Even the administration sees that.”

For now, talk about the outcome of Brazil’s forthcoming presidential elections has taken centre stage as investors hope that a change in government next year will set the stage to turn round the country’s flagging economic growth.


Marina Silva’s sudden surge in the polls once she became the Brazilian Socialist Party candidate after the death of her running mate Eduardo Campos in a plane crash in August has raised optimism over the prospects for a credit that has long lost its lustre among the buyside accounts.

Silva’s economic plan, which calls for more central bank independence and the creation of a fiscal responsibility council, has only endeared her more to the markets, which have shown a willingness to back any anti-Rousseff ticket.

The country’s bonds have swung in response to any advancement by Silva over Rousseff in what looks likely to be a tight race during the first round on October 5 and one that is likely to see a second round on October 26.

Still, a victory for Silva is no guarantee that the country’s economic outlook will improve any time soon, though investors are likely to benefit from a short-term rally that may result in a loss for Rousseff.

“If Silva wins, the market could get ahead of itself,” Matias Silvani, a managing director in the fixed-income group at JP Morgan Asset Management, said at an EMTA forum in New York this week. “We could see significant inflows into Brazil, some rally in rates and in credit as well.”

However, Silva’s inexperience and the relatively weak position of her party raise questions over her ability to govern and create vital alliances should she emerge victorious.

Even if Silva’s team meets with some success, turning round the economy will not happen overnight and most banks see 2015 as a year of painful adjustments.

“There is a big clean-up job to do, regardless of who wins,” Rashique Rahman, co-head of EM FX strategy at Morgan Stanley, said at the EMTA event. “I wouldn’t be an aggressive buyer.”


Uncertainty over the outcome of this year’s election and the country’s economic performance pushed many borrowers to tap the international markets sooner rather than later, taking advantage of what remain historically low rates to refinance debt.

Contrary to expectations, the country saw a gush of primary bond issuance during the World Cup in the summer, with Brazilian borrowers raising some US$13bn-plus in June and July before political risks closed windows.

“You have had a lot of liability management this year and a lot of borrowers want to come because they know that 2015 is a year of adjustment in prices,” said a DCM banker focused on Brazil.

With growth expected to remain weak - Moody’s is forecasting that GDP will remain below 2% next year - borrowing needs will remain light now that many companies have already extended maturities and lowered funding costs with new debt this year.

“Unless you have capex you have nothing to do,” the banker said. “Why come again when you have already refinanced - unless you have expansion plans?”

The country still needs to raise considerable sums to cover infrastructure needs - about R$1trn (US$423bn) over the next three to five years, according to Moody’s - but with revenues on such projects largely generated in Reais, borrowers will probably look to local markets, which in any case are often cheaper than a dollar trade. (Reporting by Paul Kilby and Davide Scigliuzzo; Editing by Sudip Roy)

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