Has Brazil’s downgrade already been priced in?
806166FA-1780-469E-969B-B722E616542C

4th April 2014
Is the market indifferent to S&P’s downgrade?

Respected – and sometimes demonized – the credit rating agencies are proud of their technical criteria and collegiate decision-making.


When they shine their spotlight on countries, they judge – with an impartiality that they claim to achieve by using econometric tools – the quality of sovereign credit. But the truth is they do much more.


Contrary to what the agencies themselves say or what those who are “ranked” would like to hear, these ratings have an impact that goes beyond credit institutions. Although they seek scientific objectivity, the agencies also use subjective criteria. For that reason, they make a lot of mistakes. But they get a lot right too.


This works on two levels. On the first level, it has an impact on economic actors who, for statutory reasons or because of decisions by their boards of directors, do not allow capital inflows to countries that have not reached “investment grade”. On the second level, the ratings become veritable weather-vanes for the formation of expectations about the performance of the whole economy. 


The agencies’ tendencies to mold opinions on a broader horizon, not just restricted to the “credit” issue, is also perceived by multilateral economic institutions.


In recent times, the IMF and the World Bank have been used more as a source of statistics and forecasting than in their original respective roles as emergency provider of liquidity and support for development.


Everything was going great and the agencies seemed right on target when they promoted Brazil in 2008. But there was a large dose of subjectivity in that “upgrade” as well.


Today, the market – having supposedly already “priced in” Brazil’s risk – appears indifferent to Standard & Poor’s recent decision. In this context, the downgrade seems not merely ill-timed and wrong, but also harmless.


There is, however, another dimension to Brazil’s downgrade. When the external debt was a big issue on the international agenda, the agencies also considered “good will in honoring debts”. This is something that cannot be measured in numbers.


Whether we like it or not, they now also assess “readiness to promote reforms”, which they see as leading to growth and competitiveness. They look at a country’s predisposition to change course and the political capital necessary to do this.


Maybe the market has actually anticipated – and assimilated – the deterioration in the quality of credit arising from some fiscal imbalance, the bad management of state-run enterprises, micro-management of concessions and the adventure of the “new economic model”. Even if these negative vectors are played down, other aspects of the downgrade may gain more strength in 2015 and 2016.


We are talking about the absence of any appetite for structural reforms (to the labor market, to the fiscal situation and the business environment) and about Brazil ’s growing distance from the great centers of world trade. These are problems that take more time to show up, but they are more corrosive.


Without reforms and greater integration with the global economy, a substantial part of the bill for the downgrade will arrive only in the next few years – and it will be large.


mt2792@columbia.edu 

Subscribe to latin trade magazine
Click here to begin a subscription for Latin Trade magazine, available both in print and online.
Subscribe to lt.com
Click here to begin an online subscription to LT.com, with its extensive ranking, indices, and market intelligence on Latin America.
Subscribe to free Newsletter
Subscribe here to our free newsletter – getting the latest business headlines from Latin America in your inbox every day.
LOGIN
FOR READ MORE LOGIN
LOGIN
LOGIN
Forgot your password
SEND
READ MORE
Aenean sollicitudin, lorem quis bibendum auctor, nisi elit consequat ipsum, nec sagittis sem nibh id elit. Duis sed odio sit amet nibh vulputate cursus a sit amet mauris. Morbi accumsan ipsum velit. Nam nec tellus a odio tincidunt auctor a ornare odio. Sed non mauris vitae erat consequat auctor eu in elit.Aenean sollicitudin, lorem quis bibendum auctor, nisi elit consequat ipsum, nec sagittis sem nibh id elit. Duis sed odio sit amet nibh vulputate cursus a sit amet mauris. Morbi accumsan ipsum velit. Nam nec tellus a odio tincidunt auctor a ornare odio. Sed non mauris vitae erat consequat auctor eu in elit.

Access Denied

Please log in or register

Read Our Latest Issue

latintrade-followus-spanish
FOLLOW US


SUGGESTED ARTICLES

MOST READ

Latin Business Traveler 26 Apr - 4:43 PM
Black Market Currency Trading: Worth the Risk?
5704153E-222A-42F9-95FC-13DC392E4149
Exchanging dollars for local currency in Venezuela and Argentina can make sense, but carefully consider all the options first.Business travelers arriving in Venezuela and Argentina will quickly learn that trading U.S. dollars or Euros for local currency on the black market has become an ingrained part of daily routines. Spurred on by skyrocketing or wildly fluctuating exchange rates stemming from both countries' difficult economic conditions, many visitors simply abandon any attempt at legal currency exchange. Before deciding whether or not to dabble in these technically illegal transactions, however, it's important to carefully evaluate the risks and rewards of playing the black-market game. Company Credit Card or Reimbursement: Stay OfficialFor well-healed corporate travelers who either benefit from a generous per diem reimbursement rate from their company or who can simply put all of the expenses on the company credit card, it makes sense to avoid the possible pitfalls of the black market altogether. Even in Venezuela, where the high cost of such basic expenses as hotel rooms, dining and taxi rides make doing business in New York or London look downright inexpensive by comparison, the risk of running afoul of the law will likely outweigh the benefit of hefty savings on daily expenses. Tighter Budget: Consider Black-Market Exchange in VenezuelaFor those on a tighter budget, however, the 50% to 75% savings that black market currency exchanges provide may quickly add up to big savings. According to Xpatulator.com, a site that evaluates the cost of living of 732 cities in the world, Caracas ranks as the seventh most expensive place on earth. Venezuela's highly overvalued Bolivar currently trades on the official exchange rate at 4.3 Bolivar to 1 U.S. dollar. Given the vociferous hunger for dollars and Euros in that nation, black-market exchange rates of up to four times the official level can be obtained for sums of $1,000 or more. Even for a significantly smaller amount, those who hold cherished greenbacks, or even Euros, can receive two to three times more Bolivares than the official rate would permit. Visitors arriving at Maiquetía, the international airport that serves Caracas, will quickly be approached and invited to exchange currency if they project even the slightest appearance of a foreign businessperson or tourist. During a typical stay in the country, such visitors will be approached time and time again and invited to change dollars at a very beneficial rate. A discrete inquiry to a hotel bellman or taxi driver will also open the door to black market-type transactions. In Argentina: Little Black-Market AdvantageIn Argentina, the cost of living is not as inflated. So, although the same basic structure of unofficial currency trading exists, the financial benefits of black-market ventures, compared to the situation in Venezuela, are somewhat more modest. The Argentine Peso currently trades at just less than 5 pesos to 1 U.S. dollar. The black market rate of around 7 pesos to the dollar represents about a 40% benefit. Avoid Illegalities by Negotiating to Pay in DollarsA common practice that negates the outright illegality of black market trading is offering to pay for goods and services with dollars. If the offer is accepted - and given the high demand for U.S. currency, it often is - the rate in Argentina generally falls between the official and black market rates, producing a net benefit of about 20%. In Venezuela more than double that benefit can be anticipated. Before deciding to exchange currency via the black market, consider the risks and the benefits, and always remember that it is illegal. Just like jaywalking, however, many do it without giving it a second thought.