Well another day, another horrible piece of economic data out of Brazil.
Core retail sales in South America’s most important economy slid 2.7% M/M in December, erasing a meager gain the country eked out in November when the numbers got a boost from promotions.
Broad retail sales, meanwhile, declined 0.9% marking the eleventh decline in thirteen months. They’re now off more than 16% since peaking in August of 2012.
The breakdown is a veritable disaster, with sales of office and telecommunications equipment down 9.1%, furniture and appliances down 8.7%, and clothing and footwear lower by 2.1%. Goldman sums it up: “The near-term outlook for private consumption and retail sales remains challenging owing to the continuing deceleration of credit flows from both private and public banks, high levels of household indebtedness, declining employment and real wages, higher interest rates, rising local and federal taxes (including via inflation), higher utility and transportation tariffs, heightened economic and political uncertainty and depressed consumer confidence.” Oh, is that all?
Here’s what “disaster” looks like:
As we wrote on a number of occasions last summer (when things really began to go south in earnest), the depth of Brazil's depression recession is astounding. But you'd think that after six months of abysmal data, one would eventually become desensitized to the numbers.
But not in Brazil's case.
Every time we think nothing else could surprise us it seems to get worse. In the latest example of a shockingly bad economic outcomes from the "B" in BRICS we learn that in 2015, 5,525 companies went bankrupt. That's the most since 2008.
“It’s legitimately a credit crisis,” says Fitch's Joe Bormann, who, as Bloomberg writes, "has never seen the nation’s companies in such a dire state."
"No Brazilian company has raised financing in overseas bond markets since June as an unprecedented corruption scandal at the state-owned oil producer and ratings downgrades have prompted investors to shun the nation’s financial assets," Bloomberg goes on to note.
As is evident from the retail sales data outlined above, things aren't likely to get better any time soon. Of course the worse it gets, the more the market will punish the country's corporate borrowers. Have a look at the following chart, again from Bloomberg, which shows how quickly credit spreads have blown out for Brazilian issuers who are now effectively shut out of international markets:
So consider that, then note that the BRL plunged 33% last year:
If that trend continues and Brazil remains mired in recession crimping corporate profits, one has to wonder if the country's corporate sector may have trouble servicing its USD debt. Some $24 billion in debt service payments come due this year and next.
We close with what we said in early December, when we took a look at Deutsche Bank's assessment of the EM corporate debt picture: When Deutsche looks at what the bank says is a representative sample of corporate borrowers across LatAm and Ceemea, they find that only 14% of the sample is "in danger" based on net debt-to-EBITDA and cash-to-short term debt. However, when the bank uses 9%+ bond yields as a proxy for "oh shit," it turns out that a whopping 27% of the LatAm sample is in trouble. Specifically, Brazil has some $89 billion in USD bonds trading above 9% (a large chunk is Petrobras paper). Here's the full breakdown: Petrobras (USD37bn), USD20bn of industrials, USD15bn of banks (mostly subordinated), USD6bn of rigs, USD3bn of royalty-backed bonds and USD8bn of other sectors.