Brazil’s fiscal deficit, S&P, Fitch and Moody’s downgrade rating to junk BRL

Brazil's fiscal situation in the recent past have worsened, the consolidated public sector accounts posted a BRL7.3bn deficit.

The central government imbalance reached BRL6.9bn deficit. Moreover, the state owned enterprises added BRL 0.2bn to the deficit.

The primary deficit has reached BRL15bn so far this year, an unprecedented result in Brazilian fiscal data.

Over the past year, the primary deficit reached -0.8% of GDP. This is well below the already concerning 0.15% of GDP primary surplus target for 2015.

Extremely high real interest rates and an ever increasing debt to GDP ratio add up to very concerning fiscal accounts' result.

The nominal fiscal deficit is now over 9% of GDP against 6% last December.

If fiscal setbacks do not resolve in the coming weeks, then our hedging frameworks continue to point towards an overvalued BRL. This has mainly led to higher than expected inflation, a collapse in productivity/investment, and a persisting current account deficit.

We reckon that ahead of a full downgrade to sub-investment grade by Fitch and Moody's, S&P downgraded the country's to junk the investment status. The fiscal deficit of 8%-9% (including interest expense), appeared to have gotten S&P's dander up, prompting the rating action.

On the external front, we also forecast USD/CNY weaker to keep pushing USD/BRL higher, as result the BRL may break higher than 4.50.