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Beyond Ratings Weekly Digest

Your briefing on augmented financial risk analysis

N°124 ▪ 08th December 2017



Brazil: The Selic rate at historically low level to fight … disinflation

On Wednesday, December 6th, the Brazilian Central Bank (BCB) lowered its key interest rate (i.e., Selic rate) for the tenth time since October 2016 when it peaked at 14.25% in a context of hard recession and strong inflationary pressures. In just over a year, the Selic rate has been slashed by more than half to reach its lowest level at 7%, lower than the previous 7.25% floor prevailing between October 2012 and April 2013. At the same time, it is the decline in inflation (i.e., disinflation) that seems worrying and there is nothing better than exceptional measures to curb exceptional disinflationary pressures. Over the last two years, the inflation rate has fallen from over 10% on a year-on-year basis (peaking at 10.7% in January 2016) to less than 3% since mid-2017 (with the lowest point reached in August at 2.5%). As a reminder, the BCB has an inflation target of 4.5% ± 2% on a year-on-year basis. Given the vertiginous drop in the inflation rate, the BCB had to act.

We said that the BCB had to act, but the environment in which the Brazilian institution is conducting its monetary policy has drastically changed. Indeed, Brazil timidly leaves one of the most important recessions in its history and the political landscape has been buffeted by large-scale corruption scandals resulting in the impeachment of former President Dilma Rousseff. In the third quarter of this year, the largest economy in Latin America recorded a growth of only 0.1% over a quarter while data for the previous two quarters were strongly revised to +0.7% and +1, 3% respectively for the second and the first quarter of 2017 (vs +0.2% and +1% respectively in first estimate). On the political side, in spite of himself being a product of political turmoil, arriving after the impeachment of his predecessor, Michel Temer has been able to establish a form of budgetary discipline and set up a number of structural reforms in several sectors, including the oil and the labour markets. Nevertheless, the markets are worried about the difficulties the Conservative government has encountered in pushing pension reform, which is currently under consideration in Parliament. This reform is considered as the most important of a series of austerity measures to try to revive economic activity and fill a fathomless budget deficit.

From a more forward-looking perspective, there is a strong chance that economic growth will accelerate in coming quarters, notably in line with IMF forecasts. Indeed, the Washington-based institution forecasts growth of 0.7% this year and 1.5% in 2018. At Beyond Ratings, we anticipate a stronger recovery for 2018. However, a major stake could come play the spoilers: the general elections in October 2018. Beyond the fact that Brazil suffers from a political vacuum following the corruption scandals and that no pro-market “candidate” is in a good position in the polls, there may well be surprises with the return of former President Lula da Silva or a breakthrough by populist Bolsonaro.

Beyond the political uncertainties, no form of unanimity seems to emerge from the consensus as to what the BCB will do in terms of the conduct of its monetary policy in 2018. However, we believe that the BCB will end its easing cycle in the course of 2018 after one to two further cuts in its Selic rate in order to contain the disinflationary pressures currently at work.

Julien Moussavi, Head of Economic Research




Sovereign Risk

A flattening US yield curve: what does the market see?

Spread of 10-year over 2-year Government Treasuries (in pp)


The difference between 10-year and 2-year US Treasuries declined tendentially since December 2013, from 2.5 pp to around 0.5 pp this month. As this move is typically a hint of economic recession, it was enough to trigger a wave of questioning about the outlook for the US economy.  However, this time is different. Indeed, this highlights mainly market expectations of the next developments in Federal Reserve’s monetary policy: as expected, a tax reform could boost the US economy in the short-term, but is unlikely to trigger a boost to inflation at longer-term that would drive 10-year rate higher and it could keep the Federal Reserve on path to normalising. Thus, the market is waiting for an increase of the target Fed funds rate when it meets this month. The more monetary policy-sensitive 2-year rate increased by 54 bps since September, due to rising expectations of interest rate rises from the Fed, while 10-year increased by only 29 bps during the same period. This monetary policy expectation causality on spread between short and long-term yields is confirmed by the observation of Canadian, German, French and British spreads. As expected, Canadian and British spreads are closely linked to the US one, following Federal Reserve monetary policy. It is noteworthy that German and French spreads diverge as ECB monetary policy isn’t on path to normalising yet. Finally, market already incorporate the expected Fed funds rate hike this month, which should be the final Yellen decision, before her replacement by Jerome Powell in February 2018.

Sources: Beyond Ratings, Datastream



One for hole and hole for one?

Hole in the Ozone Layer

On November the 2nd, NASA and NOAA announced that the hole in Earth’s ozone layer was the smallest observed since 1988. It is the proof that a worldwide coordinated action can fix a lethal issue for humankind. It required warnings from scientists, political consideration and technology transfer from richest to poorest countries. In 1987, the Montreal Protocol on substances that deplete the ozone layer launched a successful process to end use, import and export of such substances. 20 years later, result of this phase-out is there and it is a beacon of hope whereas climate change mitigation enhancements are poor since the 2015 Paris Agreement.

Sources: Beyond Ratings, NASA Ozone Watch


Carbon/Climate Change

European countries effort in a 2°C scenario

Yearly GHG emissions in 2030 in a +2°C scenario

On view of this map, most European countries must take an effort to be compliant with a 2°C scenario. Some countries are exception to this rule: Northern Europe countries such as Sweden or Latvia are virtuous. Some others, Switzerland or Croatia, must make a smaller effort than the others.


Source: Beyond Ratings, World Wide Climate Policy Tool






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© Beyond Ratings 2017

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Photo credit via Visualhunt/CC BY-SA or other: Front page ▪ Credit 1: CECAR – Climate and Ecosystems Change Adaptation R; Credit 2: Tony Webster; Credit 3: Kiefer.; Crédit 4: NASA Goddard Photo and Video / Research notes ▪ Credit 1: DnDavis (via; Credit 2: zhu difeng (via Fotolia); Credit 3: Mny-Jhee (via Fotolia); Credit 4: xmentoys (via Fotolia)


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