JPMorgan Writes Off Brazil Bond Pickup as Elections Loom

Companies in Brazil are shunning the local bond market on speculation President Dilma Rousseff, who’s presided over an economy plagued by surging inflation and a lack of growth, will be re-elected.

Corporate borrowers have issued 35.44 billion reais ($15.24 billion) of bonds in the first eight months of the year, a 7.8 percent decrease from a year ago and the least since 2010, according to the most recent data from Anbima, Brazil’s capital markets association.

With the first round of elections less than three weeks away, polls show Rousseff is regaining the popular support she lost earlier this month. That’s revived concern a victory by the incumbent will mean four more years of fiscal policies that led to Brazil’s first recession since 2009, which may deter companies from borrowing to expand, according to JPMorgan Chase & Co. and Banco Votorantim SA. This month, companies have issued 2 billion reais of bonds, less than half as much as a year ago.

Companies are waiting “until there is more clarity on what the next government will be like,” Ricardo Leoni, the head of Brazil’s debt capital markets at JPMorgan, said in a telephone interview from Sao Paulo.

Officials from the president’s office didn’t reply to e-mails and a call seeking comment.

Assuming Rousseff is one of the top finishers in first-round voting on Oct. 5, she would then probably garner 41 percent of the vote in an Oct. 26 election runoff, according to a Vox Populi poll released Sept. 15.

Dead Heat

That puts her in a statistical tie with opposition candidate Marina Silva, who received support from 42 percent of those polled. The Sept. 13-14 survey of 2,000 people has a margin of error of 2.2 percentage points. Silva’s lead was seven percentage points in an Aug. 31-Sept. 2 poll.

An Ibope poll published yesterday showed a runoff between Rousseff and Marina Silva would be too close to call while backing for third-place candidate Aecio Neves increased. Rousseff would win 36 percent of voter support in the first round, with 30 percent for Silva and 19 percent for Neves, according to the Sept. 13-15 survey. In an Oct. 26 runoff, Silva would have 43 percent of voter support, compared with 40 percent for Rousseff, according to the poll published on Jornal Nacional television.

In the past three weeks, Rousseff has stepped up attacks against Silva, saying the former environment minister doesn’t have the experience to lead and would reduce investments in offshore oil and gas reserves. Silva says the incumbent’s policies contributed to a recession in the first half of this year and quicker inflation.

Government’s Role

Since taking office in January 2011, Rousseff has increased the government’s role in companies, changing concession-renewal rules to lower electricity rates and capping gasoline prices to tame inflation that last month exceed the 6.5 percent limit of the central bank’s target range. Policy makers raised the benchmark interest rate by 3.75 percentage points over nine straight meetings through April before holding it at a two-year high of 11 percent for the past three.

Latin America’s largest economy shrank 0.6 percent in the April-June period from the previous three months, after contracting 0.2 percent in the first quarter, the national statistics agency said Aug. 29.

The real declined 1.1 percent to 2.3579 per dollar today.

Average Rates

Silva has promised to cut inflation by half and called for a fiscal-responsibility body to independently monitor budgets and spending to verify that the government is complying with fiscal targets.

The average interest rate on floating-rate local bonds with maturities longer than 12 months issued this year was 10.99 percent, 0.12 percentage point above the average in the same span last year, according to data compiled by Bloomberg.

“This has been a tough year for local companies, with all the concerns regarding politics and the economic scenario we’ll have starting next year,” Carolina Lacerda, the head of investment banking at UBS AG’s Brazil unit and a director at Anbima, said in an interview in Sao Paulo. “Companies are cautious, especially because the cost of funding, in general, is at a very high level.”

While Brazilian companies are staying away from the local debt market, they’re boosting overseas offerings to lock in borrowing costs before U.S. policy makers raise interest rates. They have issued $42.7 billion this year, a 45 percent increase from the same period in 2013, data compiled by Bloomberg show.

Growth Outlook

Ricardo Carvalho, an analyst at Fitch Ratings, said that if economic growth begins to recover later this year, issuance in the local market will probably rebound.

Brazilian companies aren’t selling bonds “because they are not spending much,” he said in an interview in Sao Paulo. “That could change once the economy starts to improve, which could happen before the end of this semester.”

While Carvalho sees the potential for growth to accelerate, Moody’s Investors Service cut the outlook on Brazil’s credit rating to negative on Sept. 9, saying the economy is unlikely to rebound in the short term.

“Companies seem to be waiting for what will happen in the macroeconomic scenario and after elections before selling more debt,” Reinaldo Lacerda, who helps manage 43 billion reais in assets as the investment director at the wealth management division of Banco Votorantim SA, said in an interview in Sao Paulo.

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