Moody’s sees Brazil ‘perfect storm’

Agency puts Saudi on watch list, vows patience on S. Africa

LONDON, Dec 21 (RTRS): Moody’s is likely to follow Standard & Poor’s and Fitch in cutting Brazil’s credit rating to non-investment grade, its top sovereign analyst said in a Reuters interview, but the agency plans to take its time over a potential downgrade of South Africa.

“It’s stark how quickly Brazil’s growth projections have declined... and also the political problems that have not been resolved. There is almost a perfect storm,” said Alastair Wilson, head of sovereigns for Moody’s.

“In this case we are looking at one notch, not a multi-notch downgrade. The question is, if we downgrade, what we would have as the new outlook because that would reflect whether we thought the position was stable or could get worse.”

South Africa is another key focus, after President Jacob Zuma unexpectedly sacked Nhlanhla Nene this month and replaced him with the relatively unknown David van Rooyen, before recalling Pravin Gordhan to his old job. Its economy is stumbling badly and economists worry it could be the next big emerging market to lose investment grade status.

Moody’s currently rates it two notches above junk and one notch above S&P and Fitch at Baa2, but it cut the outlook to negative last week.

“If we saw that combination of low growth and changes in policy that suggested, actually, that debt levels are not going to remain stable, fiscal policy will become expansionary and that this is a change in the government’s longer-term intentions, that would be a cause for downgrade,” Wilson said.

However, he added that domestic issues of this kind tended to “unfold over a longer period of time” and could take as long as 12 to 18 months to really be clear.

In a wide-ranging interview, he also said Spain’s political uncertainty could see Moody’s put the brakes on a longawaited rating upgrade.

Saudi Arabia is another country on the watch list. It has huge currency reserves but the oil price slump has left it with a fiscal deficit of more than 20 percent and it is now contemplating issuing debt and raising taxes.

If, as expected, oil prices stay low for some time and the government can’t push through measures like spending cuts and new taxes, the outlook on the Saudi Aa3

While that was a sharp deceleration from the brisk 3.9 percent pace logged in the April-June period, growth remained around the economy’s long-run potential.

The Federal Reserve last week raised its benchmark overnight interest rate by 25 basis points to between 0.25 percent and 0.50 percent, the first increase in nearly a decade. The rate hike was a vote of confidence in the economy, which has been buffeted by slower global demand, a strong dollar and spending cuts in the energy sector.

“This is not an economy that is just muddling along. The GDP data today back up the Fed’s decision to liftoff this month and paves the way for more rate hikes early in 2016,” said Chris Rupkey, chief economist at MUFG Union Bank in New York.

While other data on Tuesday showed a surprise 10.5 percent plunge in home resales last month, economists cautioned against reading too much into the drop, noting that new mortgage disclosure rules had caused delays in closing contracts.

The National Association of Realtors said existing home sales tumbled to an annual rate of 4.76 million units, the lowest level since April 2014. The drop is in stark contrast to robust housing starts, new home sales and bullish homebuilder sentiment.

US stocks were trading higher, also bolstered by crude oil prices, which eased off multi-year lows. US Treasury debt prices fell and the dollar weakened against a basket of currencies.

When measured from the income side, the economy grew at a 2.7 percent pace, not the 3.1 percent rate reported last month, to account for a modest downward revision to corporate profits.

Businesses accumulated $85.5 billion worth of inventory in the third quarter, instead of the $90.2 billion reported in November. That meant the change in inventories sliced off 0.71 percentage point from third-quarter GDP growth, instead of the 0.59 percentage point the government estimated last month.

A record increase in inventories in the first half of the years left warehouses bulging with unsold merchandise and businesses with little appetite to restock.

Despite efforts to whittle down the stockpiles of unsold goods, inventories remain relatively high and will probably weigh on growth in the fourth quarter. Estimates for fourth-quarter growth are currently around a 2 percent rate.

Consumer spending, which accounts for more than two-thirds of US economic activity, grew at a 3.0 percent rate in the third quarter as previously estimated. Spending is being supported by a strengthening labor market and rising home values. Savings, which are near three-year highs, and low inflation are also helping to underpin consumption.

Growth in business spending on equipment was raised to a 9.9 percent rate from a 9.5 percent pace. There were upward revisions to investment in residential construction and government spending.

The drag from trade was slightly larger than previously reported. A measure of private domestic demand, which excludes trade, inventories and government spending, was revised up one-tenth of a percentage point to a 3.2 percent pace.

There was a modest downward revision to investment in nonresidential structures, to account for ongoing spending cuts by energy firms following a collapse in oil prices.

People queue at the checkouts of a supermarket in Rio de Janeiro, Brazil, on Dec 21, as they buy groceries for

Christmas. (AFP)

rating could be cut.

“I don’t want to say that a negative outlook would be likely in that case, but it’s certainly a possible outcome,” Wilson said.

It’s not all doom and gloom in emerging markets, though.

Argentina is looking up following the election win of pro-reform Mauricio Macri, India is performing well, and Russia’s economy has weathered the oil slump and Western sanctions better than originally expected.

A key question for Argentina now is whether Macri can get the country back into borrowing markets by ending a years-long spat with holdout creditors who rejected the terms of the country’s 2005 and 2010 bond restructurings.

“Would it be an instant upgrade if things were resolved with the holdouts? If they can resolve this, it would certainly be a very positive step,” Wilson said, adding the rating could over time rise three or four notches to “somewhere around” the high B - Ba range.

“But I don’t think the next move would be a multi-notch move up. The thing that will release the rating is policy improvements and these take time,” he said.