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Brazil downgrade risk 50/50, says JPMorgan strategist

Feb 20, 2014

Latin America’s largest economy could see rating cut to BBB- as uncertainty increases in run-up to the election

     
     
   Source: Robbie Dale  
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.

"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 policy.

"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



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