On 15 March, cities across Brazil (and the opposition stronghold of Sao Paolo in particular) were the scene of the biggest anti-government protests in three decades. With the number of participants estimated at 2.2 million, the demonstrations indeed dwarfed the much-mediatised ones of June 2013. The ailing economy is clearly still on Brazilian minds. Despite continuous monetary policy tightening over the past two years, inflation remains well above the 4.5% central bank target. Currency depreciation (the real has fallen by more than 18% vis-à-vis the US dollar since the beginning of the year) and a long-overdue upward adjustment of regulated prices (fuel, electricity…) stand to lift the rate to 7% this year, the highest level since 2004. Meanwhile, after stagnating in 2014, Brazilian GDP is expected to contract by 1% in 2015 due to lower commodity prices, expected fiscal tightening and subdued confidence. With regard to the latter, investors had been wary about eroding competitiveness and inconsistent macroeconomic policies for some time already, but consumer confidence proved resilient until recently. This is changing now that households start to feel the pinch of tightening credit conditions and rising unemployment. Adding to protesters’ discontent is the multi-billion dollar corruption scandal that has engulfed state-owned oil company Petrobras. The scale of the scandal is such that the company has not yet released audited financial statements for 2014 and that it has lost its investment grade credit rating with Moody’s, which has in turn critically undermined Petrobras’ access to financial markets.

Impact on country risk

Protester calls for the impeachment of President Dilma Rousseff over the Petrobras affair are highly unlikely to materialise. Even though she headed the company at the time when much of the suspected wrongdoing took place, there are no indications of her personal involvement. That being said, the scandal is likely to have a significant political and economic fall-out. For one thing, cohesion within Dilma Rousseff’s already-weak government coalition (see her narrow election victory in October 2014) will be further strained as 33 of its Congressmen face criminal investigations over the affair. This will complicate the fiscal consolidation effort that is needed to revive investor confidence (for the first time since 1997, the Brazilian public sector recorded a primary deficit in 2014). Moreover, because the corruption case is aggravating the financial strain associated with lower oil prices, Petrobras has already cut its 2015 capital expenditure plan by 20%. The construction sector will suffer as well, as companies implicated in the scandal (among which many of the largest companies in Brazil) are prevented from working with public entities as long as investigations are proceeding. In light of these evolutions, the rise of the commercial risk in Brazil (see recession, high inflation and currency depreciation) is unlikely to reverse soon. As for the country’s liquidity position, risks associated with increased short-term indebtedness and current account deficits (which reached 4.2% of GDP in 2014, the highest level since 2001) remain mitigated because of the solid buffer of international reserves (which cover the equivalent of more than one year of goods and service imports), even if a sharp deterioration of external financing conditions could add pressure.

Analyst: Sebastian Vanderlinden, s.vanderlinden@credendogroup.com