The recession continues to deepen (GDP contracted by -1.9% q/q in Q2, dragged down mainly by falling investment and private consumption) while inflation continues to soar. The current account deficit will remain large due to low export revenues (lack of competitiveness, low commodity prices, uncertain outlook in China, gloomy outlook in neighbouring countries). Financing of the external deficit could prove challenging (low revenues from exports, Fed tapering, capital flight) and downward pressures on the BRL will remain strong. Alongside, public finances are deteriorating with a primary deficit expected for 2016 and public debt increasing rapidly. Consequently, we have changed the Short-Term Rating to Sensitive (3) from Medium (2). The Medium-Term Rating continues to be B.
Systemic risk is contained at that stage as the government has a strong financial position. However, cyclical risks have increased. We revised down our growth forecast in the course of this year to +6.8% in 2015 (from +7.8%) and +6.5% in 2016 (from +6.8), with a possible deviation of +/-0.2pps each year. This revision reflects lower growth in exports and investment, a less favourable financing mix (lower cost of credit but high corporate debt) and prevailing deflationary pressures in the manufacturing sector. Financing risk has increased in line with higher financial volatility and the still high level of corporate debt. The insolvency forecast was revised up significantly to an increase by +25% in 2015 (from +8% previously). Consequently, we have changed the Short-Term Rating to Medium(2) from Low (1). The Medium-Term Rating continues to be B.
Economic growth is weakening, with GDP growth set to decelerate to +4.8% this year (from +6% in 2014). The export performance has been affected by lower commodity prices and weaker global demand. Domestic buffers have weakened. Consumer confidence is on a downward trend as a result of various political scandals, lower economic prospects and lower “global purchasing power” due to the declining ringgit. The authorities have little scope to support growth: domestic vulnerabi-lity persists including high household debt and high public debt compared to regional peers; and external risk has increased as reflected by the large fall in FX reserves and the sharp currency depreciation. Going forward, China’s slowdown and the Fed rate hike add further worries. Consequently, we have changed the Short-Term Rating to Medium(2) from Low (1) and the Medium-Term Rating to BB from A.