Market Overview

Fitch On South America's Big Economies: Shaves Brazil, Upgrades Argentina

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Fitch Ratings has been reviewing its stance on South America.

Between last Thursday and this Monday, the firm decided to downgrade its rating on Brazil’s:

  • Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs), from 'BB+' to 'BB,' keeping a Negative Outlook.
  • Senior unsecured Foreign- and Local-Currency bonds, from 'BB+' to 'BB.'
  • Country Ceiling, from 'BBB-' to 'BB+'
  • Senior secured pass-through notes issued by Brazil Loan Trust I, from 'BB+sf' to 'BBsf,' issuing a Negative outlook. This applies to $661.9 million notes.

In addition, analysts at Fitch downgraded six Brazilian subnationals this week. The Sao Paulo, Santa Catarina and Parana's States Issuer Default Ratings (IDRs) were cut from 'BB+' to 'BB.' For their part, the cities of Sao Paulo and Rio de Janeiro received the same demotion. Finally, for the state of Rio de Janeiro’s IDRs were downgraded from from 'BB’ to 'B+.' The rating outlooks remain generally Negative.

Related Link: The Brazilian Giver: Maranhão Goes Back On Rousseff's Impeachment Annulment

According to a press release issued last week, the downgrades seek to reflect the worse-than-anticipated economic downturn, the failed attempt of the government to “stabilize the outlook for public finances and the sustained legislative gridlock and elevated political uncertainty that are sapping domestic confidence and undermining governability as well as policy effectiveness.” This political and economic uncertainty also granted the maintenance of the Negative Outlook. The subnational downgrades were justified by Fitch’s belief that none of these entities can be rated higher that the sovereign.

Argentina: On The Other End Of The Seesaw

Brazil’s next-door neighbor, Argentina, is sitting on the other end of the teeter-totter. After the Southern country cured the default from 2014 and resumed debt payments to restructured bondholders, Fitch decided to upgrade its Long-Term Foreign Currency Issuer Default Rating (LT FC IDR) from 'RD’ to 'B', issuing a Stable outlook.

The firm also upgraded Argentina’s Short-Term FC IDR from 'RD’ to 'B,’ and reiterated a ‘B’ rating on the country’s senior unsecured foreign-currency bonds, its Long-Term Local-Currency (LC) IDR, and its Country Ceiling.

“In addition, Argentina's ratings reflect the improved consistency and sustainability of Argentina's policy framework, reduced external vulnerability, and the easing of external and fiscal financing constraints,” a press release issued Tuesday read.

“The Stable Outlook balances these improvements against risks related to relatively weak external liquidity, continued macroeconomic underperformance compared with peers, and deterioration of public finances in recent years. Argentina's ratings also balance structural strengths such as GDP per capita and social indicators against a weak debt repayment record.”

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.

 

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