Brazil’s (Ba2 negative) economic prospects are improving after a deep recession, but the recovery will be arduous and any improvement in overall credit strength will take time to develop, says Moody’s Investors Service in a report.
Moody’s expects Brazil’s economy to grow by 0.5% next year after contracting by 3.5% in 2016. The recovery will be led primarily by business investment, on the back of rising confidence, and the need for companies to increase production to replenish depleted inventories.
The conclusion of the presidential impeachment proceedings has also allowed the Temer administration to pursue credible inflation policies as well as measures to strengthen fiscal discipline. The proposed measures are vital in alleviating investor concerns and maintaining capital flows, as well as in boosting confidence.
“The stabilizing economic conditions will help contain financial stress for Brazilian companies, and will support modest improvements in corporate performance,” said Gersan Zurita, a Senior Vice President at Moody’s. “However, tight liquidity conditions, high interest rates and unemployment will continue to weigh on the economy through at least late 2017.”
Capacity utilization has steadied, but also remains at historical lows and the extent to which Brazil’s export sectors support the economic recovery will largely depend on exchange rate developments.
A decline in the Brazilian real in 2015 and early this year helped boost exports, according to the report, “Cross-Sector — Brazil; Green Shoots Herald Beginning of a Slow Economic Recovery.”
Against this backdrop, banks will continue to remain risk averse. However, if confidence improves, many lenders will have the flexibility to grow their loan books more rapidly. A gradual economic recovery would not only support a rise in credit demand, but also hasten an improvement in asset quality.