Brazil, investment grade, and corporate credit markets
While we are seeing an abundance of credit available to consumers in Brazil, as we have never seen before (and especially to poor and middle class consumers), we are also seeing that credit is not all that available domestically for Brazilian companies.
Especially lacking is liquidity in the long term corporate debt markets. If a company wants to borrow money from a bank in Brazil, it is difficult and very unlikely that they will find funds of any magnitude available to them. According to a recent article in “Folha de Sao Paulo”, only 7.6% of companies claimed that high local interest rates were the main reason for them to look internationally to raise debt funding.
While local interest rates may seem prohibitive by US standards, in reality, the high interest rates are not the main reason that Brazilian companies look abroad for loans. The problem is that there is not enough liquidity, or availability of funds domestically. As a result of the credit scarcity, many companies are forced to look internationally to borrow for the long term (note that short-term lending in Brazil does not face this same availability crunch).
International long-term lending, if its your only option (excluding help from the BNDES), is definitely worth considering. And, as long as the value of the Brazilian currency (the Real) remains strong, there shouldn’t be any problem.
The trouble, in my opinion, however, is that over a period of 10 years or so, no one can adequately predict that the value of the Real will not come tumbling down. There is no reason that it should. But, on the other hand, if you look at the history of just about any currency over the long period..it never looks like a smooth and steady graph of a predictable trajectory. Instead, the typical long term currency graphs normally look a bit erratic (up and down cycles over time). Think about what is happening recently with the USD, for example.
Companies that tie their loans to a foreign currency such as the USD are taking a risk that either (a) the Brazilian currency wont depreciate, or (b) that the USD wont appreciate. While a much of this risk can be hedged away on an individual companies basis, and effectively removed from the companies balance sheets, it can not systematically be removed from the economy as a whole. If there are many Brazilian companies that all take advantage of the new “investment grade” status, and borrow from abroad, and if at some later time the currency moves in the wrong direction, there could be systematic risk of defaults on many of these corporate loans.
While the status of “investment grade” to the Brazilian government does in fact indicate to investors that loans to the Brazilian government are more secure, it does not indicate an increased level of safety lending to Brazilian corporations. The risk, however, is that the international investors will see the “investment grade” as an indication of lower risk, and will over-extend lending facilities to Brazilian companies.
What is needed rather than additional long-term lending from foreigners is for Brazil to find a way to improve liquidity in the corporate lending markets. Since the “Folha de Sao Paulo” survey clearly indicates that interest rates are not the main factor, but instead its a matter of fund scarcity, this indicates that it is a structural problem, rather than a risk problem.
On a positive note, however, the recent development of a Brazilian “sovereign wealth fund” is predicted to add approximately $20 US billion to the budget of BNDES, a development bank in Brazil that is used for funding exports. With the additional funding, there are predictions that the bank may extend its scope, and find capacity to fund many of the shortfalls due to the liquidity issues in the corporate markets. Lets wait and see….
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