Petrobras Junk Rating Pressures Brazil’s Levy to Deliver
2:17 PM BRT February 25, 2015
(Bloomberg) — Petrobras’s downgrade to junk credit rating is adding to pressure on Brazil’s new Finance Minister Joaquim Levy to deliver on spending cuts or risk a similar fate for Latin America’s largest economy.
Moody’s Investors Service on Tuesday reduced Petroleo Brasileiro SA’s credit rating two steps to Ba2, or two levels below investment grade, amid a corruption probe that has roiled the Brazilian state oil producer.
The country’s sovereign debt rating could be downgraded should the government, as the majority stakeholder in Petrobras, need to capitalize the company that has debt of $135 billion, according to Barclays Plc. To shore up investor confidence, Levy will have to speed up measures to reduce a budget deficit that almost tripled during Rousseff’s first term in office, said former central bank director Carlos Tadeu de Freitas.
“He needs to deliver what he promised,” said Freitas, currently chief economist at the National Commerce Confederation. “If they don’t get the measures through Congress, the country risks losing its investment grade.”
Standard & Poor’s cut Brazil’s ranking to one level above junk in March 2014 and Moody’s six months later lowered the outlook to negative on its Baa2 score, the second-lowest investment grade.
Brazilian bonds rose 0.4 percent the day after the S&P downgrade and have since increased 3.9 percent, according to the JPMorgan emerging markets bond index.
There’s no guarantee Petrobras’s downgrade will change Brazil’s sovereign rating, Moody’s analyst Nymia Almeida said in a phone interview Wednesday.
“Petrobras is obviously a very big company and its supply chain has very big repercussions,” Almeida said. “But in a country with a very diversified economy, not necessarily what happens at Petrobras affects the country’s rating.”
The real led global currency drops and the Bovespa fell 0.9 percent at 2:42 p.m. Wednesday as the Moody’s decision stifled demand for Brazilian assets.
Levy has pledged to return the primary budget, which excludes interest payments, to a surplus equivalent to 1.2 percent of gross domestic product this year, after a deficit of 0.6 percent in 2014. For that, he will need congressional approval that may be hard coming.
Senate chief Renan Calheiros of the ruling coalition PMDB party criticized the measures proposed to rebalance the budget as lacking a “beginning, middle and end.”
Moreover, the scandal at Petrobras may force the government to find extra funds. Levy had told Moody’s before its credit rating announcement that the government would rescue Petrobras if necessary, O Estado de Sao Paulo reported.
The company’s market capitalization peaked at $310 billion in 2009, making it the world’s fifth-largest company. Petrobras is now worth just $41.7 billion.
The oil producer, which has been all but shut off from debt markets due to the probe, has about $52 billion in bonds.
President Dilma Rousseff didn’t provide any details Wednesday when she told reporters in Bahia state that the Petrobras rating downgrade reflected a lack of understanding of the company.
The Petrobras downgrade is a reflection on the poor policies during Rousseff’s first term, rather than Levy’s handling of the situation since coming to office two months ago, said Flavio Serrano, senior economist at Banco Espirito Santo de Investimento SA in Sao Paulo.
While a sovereign credit downgrade to junk is still unlikely, it is already partially priced in by the market, said Serrano.
“Brazil isn’t as bad as Petrobras, but prices show the country is already ranked with lower-rated nations.”