Downgrade alone shouldn’t stall Brazilian infrastructure

Standard & Poor’s underlines rising risks for the execution of the government's economic plan but market insiders believe current projects are not at stake.

Despite last week's news that Standard & Poor's became the first major ratings agency to downgrade Brazil's sovereign credit rating from investment grade to speculative status, experts within the finance ministry and Brazil's second-largest bank are confident that the infrastructure pipeline will survive the economic turmoil brought on by the Petrobras corruption scandal .

The rating adjustment followed the release of a budget proposal from President Dilma Rousseff's administration to Congress forecasting a primary deficit for 2016, which would make it Brazil's third straight year of economic shrinkage.

Noting that the decision to lower the long-term foreign currency sovereign credit rating to BB+ from BBB-, and to lower the long-term local currency sovereign credit rating to BBB- from BBB+, came relatively close on the heels of the agency's July 28 outlook revision to negative, and especially so given that such updates generally assume an annual position, primary credit analyst Lisa Schineller said in a teleconference that it was a move spurred on by the committee's “increased perception of risk for execution of the government's economic plan”. 

Frustrated relations between the Rousseff administration and Congress – exemplified by Congress' steadfast resistance to enactment of fiscal austerity measures – have sparked rumours that Finance Minister Joaquim Levy is ready to call it quits, though sources close to the minister have said otherwise

In a Thursday afternoon call, Alberto Zoffmann, head of project finance for Itau BBA – Brazil's second-largest bank – told Infrastructure Investor that he does not believe that projects currently coming to market will be too adversely effected by the downgrade. 

Zoffmann noted that bonds issued against this year's construction project concessions, for example, would not mature for two to three years, so in that way, he sees little direct impact on development ambitions. He said it is important to remember that infrastructure project investments are long-term endeavours – meaning that they are investments that stand a solid chance of weathering the stormy adolescence of Brazil's democratic growth. 

More of an issue, he said, will be whether or not specific contracts for individual projects will attract capable investors and developers as the government's infrastructure ambitions unfold. 

The Finance Ministry meanwhile is continuing to push its Infrastructure and Logistics Programme (PIL), which in its current second iteration is the chosen vehicle to carry the administration's development goals.  

The PIL aims to attract outside investors to engage in project tenders and concessions, and a representative of the agency told Infrastructure Investor that currently he and his colleagues are working to reduce regulatory risk and facilitate participation of newcomers in upcoming energy auctions.

Zoffmann noted that there are many opportunities for keen investor-operator teams with the capacity and know-how to work a smart deal – and not just in greenfields and toll roads, either, though there are projects in the pipeline in those sectors that he expects to attract interest as well.

And much like in the US, while the federal government may not be able to fully prioritise infrastructure development, states and municipalities are in many cases eager partners for the right private sector team. At that level, Zoffmann said there are several state local administrations with aspirations of integrating light rail, monorail, or bus rapid transit (BRT) systems into their transportation networks to raise productivity potential and stir up economic activity at the grassroots level. 

S&P declined to outline any specific political or economic triggers that might result in a subsequent near- or mid-term downgrade, however, when asked as to whether impeachment was among them, Schineller and her colleague, Roberto Sifon-arevalo noted that any situation that further deteriorates the economic situation while also further eroding the government's ability to enforce a corrective plan would certainly change the agency's outlook.