Petrobras Dive Fueled by Rousseff’s Gain in Brazil Polls

Bond investors are coming to the conclusion that Brazil President Dilma Rousseff will win in elections that start this weekend. That’s spurred the biggest rout in its corporate debt market in 15 months.

The notes slumped 2.3 percent last month through Sept. 29, almost triple the average decline for company bonds in emerging markets. State-run oil producer Petroleo Brasileiro SA, the biggest overseas issuer in developing nations with $55 billion of debt, has seen its securities sink 2.9 percent.

The selloff is deepening as polls show Rousseff, whose spending policies have accelerated inflation while tipping Latin America’s biggest economy into its first recession in five years, gaining momentum for her re-election bid. The outcome of the vote is weighing on investors in companies led by Petrobras, which has reported $44 billion of operating losses at its refining unit since 2011 as Rousseff limited fuel-price increases to control inflation.

“It’s looking more and more like Dilma has the upper hand, and certainly people are viewing that as a negative,” Jennifer Gorgoll, a money manager at Neuberger Berman Group LLC, which oversees $3.4 billion of emerging-market debt, said by telephone from Atlanta. “If Dilma wins, it’s more of the same thing for the next four years.”

Poll Reversal

Press officials for Rousseff’s campaign, the president’s office and Petrobras declined to comment in separate e-mails. Press officials for the Finance Ministry didn’t reply to requests for comment.

Rousseff would win 49 percent of votes in a potential runoff against candidate Marina Silva, who would garner 41 percent, according to a Datafolha poll released on Folha de S.Paulo’s website yesterday. Rousseff would have 40 percent of votes in the first round, while Silva would get 25 percent, the survey of 7,520 interviewees conducted Sept. 29-30 showed. The margin of error is plus or minus 2 percentage points.

An Aug. 28-29 poll showed Silva had opened a lead of 10 percentage points in a runoff against Rousseff, with 50 percent of voter support compared to 40 percent for the incumbent.

While Silva has promised to cut consumer price increases by half and called for a fiscal-responsibility body to monitor budgets and spending independently, Rousseff has regained the upper hand by criticizing her opponent’s proposals as recessionary and inconsistent. Using her advantage in allotted television advertising time, Rousseff has also promoted the benefits of her social welfare programs that have helped lift millions of Brazilians out of poverty.

Real Plunges

Rousseff can win re-election in the first round of voting if she gets a majority of the valid votes.

If no candidate gets more than 50 percent of the vote in the first round on Oct. 5, a runoff between the top two candidates will take place Oct. 26.

The selloff induced by Rousseff’s rising support in polls caused Petrobras 2023 bonds to fall 5.1 cents on the dollar last month to 93.6 cents. That’s 3.8 cents more than the average for emerging-market investment-grade bonds in the span.

Brazil’s $4.3 billion of government bonds due 2025 fell 4.8 cents during the period, the worst month since they were issued in October 2013. The Brazilian real lost 8.6 percent, the most among 24 emerging-market currencies.

The currency weakened 1.5 percent today to 2.4833 per dollar as of 3:22 p.m. in New York.

“Investors have been selling Brazilian sovereign and corporate bonds as Dilma has taken more of a lead,” Chris Cooper, co-head of emerging markets debt at Hartford Investment Management Co., which oversees about $112 billion in assets, said in an e-mail. “What becomes important to asset prices is the likelihood of a Dilma victory.”

Negative Momentum

Brazil’s gross domestic product shrank by 0.6 percent in the April-June period from the previous three months after contracting a revised 0.2 percent in the first quarter, the national statistics agency said in August. Consumer prices rose 6.62 percent in the 12 months ended mid-September, versus 6.49 percent the month before.

Inflation has exceeded the 4.5 percent midpoint of the central bank’s target range for 48 months.

The “momentum going into the elections is negative,” Gorgoll said.

(A previous version of this story was corrected to say the second-quarter GDP report was published in August.)

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