Brazil downgrade risk 50/50, says JPMorgan strategist
Latin America’s largest economy could see rating cut to BBB- as uncertainty increases in run-up to the election
Brazil faces a 50% chance of being downgraded this year, but
the news is unlikely to trigger capital outflows because
investors have already priced in the possibility, JPMorgan's
head of Latin America research said.
|| Source: Robbie
"It's hard to venture a probability but I'd personally put
it up at 50%. ... Because it's in BBB it will go to BBB-. It
won't lose investment grade, and I think that at this stage
probably the market has already discounted that," Luis Oganes
said this week in a panel discussion about EM volatility at the
Americas Society in New York.
Standard & Poor's might be the first agency to move, he
said. Less certain was whether after any downgrade the agency
would keep the negative outlook.
"If they downgrade and stabilize the outlook I would guess
that we may actually see a rally or some pop up in prices in
Brazilian debt because more than one notch is probably fully
discounted at this stage," he said.
S&P put its BBB rating of the sovereign on negative
outlook in June. Moody's changed the outlook on its Baa2 rating
to stable, from positive, in October. And in January,
Fitch warned Brazil that it should cut spending and reduce
debt to support its BBB sovereign rating. Moody's and
S&P have also advised Brazil to tighten its fiscal
"If they keep the outlook negative, the threat will be
there, and maybe, hopefully, that will provide the catalyst
… to do what it takes to reform and straighten the
fiscal accounts after the elections," said Oganes.
Investors are increasingly wary of Brazilian risk, as
political uncertainty increases in the months leading to the
presidential election in October. LF