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Brazil Local Markets a Tough Place for Corporates

Brazil is on the path to recovery, but it is a slow process and credit conditions remain tight. The country’s economic outlook remains subdued – and hinges on stable politics and fiscal reform. Although the international markets are beginning to see increased corporate activity following a slight improvement, conditions in the country’s local markets remain difficult, and international lenders appear unlikely to wade in until the real begins to appreciate.

Nov 23, 2016 // 4:32PM

The Brazilian government has recently lowered its forecast for 2017 economic growth from 1.6% down to 1%, whilst also revising its outlook for economic growth down from -3%. It is now expected to contract by 3.5% for 2016.

While the outlook in Brazil is still improving, there is still cause for concern over the pace of its recovery. The IMF expects the Brazil’s economy to grow by only 0.5% next year – but only if political uncertainty diminishes and reform implementation continues.

Although the international capital markets have seen a growing pipeline over recent months from Brazilian corporates, the country’s local markets tell a different story.

Carlos Adati, CFO of Seara Agronegocios told Bonds & Loans that Brazil’s local debt capital markets remained very weak due to low levels of liquidity, and the fact that banks remained conservative and were only lending to top-tier corporate names.

This has driven companies to look at different ways of raising capital, such as through acquiring support from government entities. However, local debt issuances from private companies, particularly in the export sector, remained difficult.

“The local market cannot supply the funds needed for hedging for more than two years,” he added.

One Brazilian mall operator that recently sought to hit the market told Bonds & Loans that it rarely accessed the local debt markets, and only when it had to, due in part to prohibitive pricing. Others have put existing capital market plans on hold following the results of the US elections. 

The difficulty of accessing the local market has led a number of traditional local players to look towards the international capital markets and Eurobonds, which brings its own unique set of challenges.

The mismatch between the real and the US dollar is a concern for those lenders without a natural hedge, meaning that the only entities that can realistically access the international markets are Brazilian exporters.

The real-dollar exchange rate is expected to be around BRL3.6 to the dollar next year, down from previous forecasts of 3.5. The real currently stands at 3.3 to the dollar according to Bloomberg, but Brazilian exports have fallen year-to-date, prompting some observers to turn more bearish on the sectors.

Facing tight liquidity conditions locally, there is also relatively little prospect of international lenders coming to the rescue and participating in the local market – largely because of the real’s depreciation.

Nevertheless, Adati noted that there are windows of opportunity in the country’s local markets, and structured products that include generous tax benefits, like CRIs and CRAs, can assist in helping issuers come to market.

Furthermore, were the real to begin to appreciate, there may begin to be increasing foreign participation in Brazil’s local markets.

Americas Macro

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