Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Analysis: After Brazil ructions, a rethink for investors in emerging market state firms

Stock MarketsFeb 26, 2021 06:20AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. FILE PHOTO: A worker checks the fuel volumes on a train wagon near a tank of Brazil's state-run Petrobras oil company in Brasilia, Brazil

By Karin Strohecker and Simon Jessop

LONDON (Reuters) - Brazil's shake up of state-run oil firm Petrobras has caused shockwaves at home but may also prompt some bond investors to rethink their $1 trillion-plus exposure to other government-controlled companies across emerging markets.

From China's Exim Bank to Mexican oil giant Pemex or South African utility Eskom, companies wholly or partly government owned make up half of the $2.4 trillion market in emerging market corporate debt.

Such state-owned enterprises (SOEs) are generally in high demand from investors, first as their bonds carry a yield premium over sovereign's debt and second, because of the perception of state backing.

But Brazilian President Jair Bolsonaro's abrupt sacking of Petroleo Brasileiro SA's chief executive last Friday in favour of an army general "reminds investors of the risk inherent of investing in SOEs or quasi-sovereigns," said Eric Ollom, head of EM corporate debt strategy at Citi.

Petrobras shares plunged wiping out a 100 billion reais ($18 billion) in market value in two days and its bonds tumbled after Bolsonaro announced the CEO change in a social media post, following a spat over fuel price policy.

Emerging SOE debt - concentrated in financials, commodities and energy -- comprises around a fifth of the EMBI emerging debt benchmark compiled by JPMorgan (NYSE:JPM). Governance, like at Petrobras, is just one of the concerns.

Graphic: IMF top non-financial SOEs -

Utilities and power companies can be subject to politically motivated pricing directives, while financial disclosures and productivity can lag the private sector.

Profitability can take a backseat to political priorities such as creating employment or winning elections.

"First and foremost, investors need to figure out and understand where does this SOE fit into the agenda of the political and socio-and economic landscape of the country... its social importance as employer or as a contributor to the budget," Sergey Dergachev, a fund manager at Union Investment, said.

He still likes Petrobras but is taking a wait and see attitude for now on a company that regularly catches the limelight. In 2018 the government stepped in to lower fuel prices in response to a crippling nationwide truckers’ strike, while last week's CEO dismissal came after right-wing populist Bolsonaro said recent fuel price hikes were hurting the Brazilian people.

Other investors such as Citi's Ollom are more sceptical, noting Petrobras bond spreads versus the sovereign blew out to multi-month highs of near 100 bps, from 30 bps. The move also hit Brazil's currency and its sovereign bonds.

"If we keep getting bad news, we could maybe get a more permanent repricing," Ollom said.


Investors aren't yet rushing to sell out of emerging market SOEs more broadly though.

And close government ties can be a boon.

Mexico just extended a $3.5 billion lifeline to state oil firm Pemex to shore up finances and crude output. Government backing allows Pemex to run a net debt leverage of 8.5 times - well above many other oil firms.

Debt overhauls are rare at SOEs, though recently Chinese bond markets have been spooked by a wave of SOE defaults and Argentina's YPF this year was forced to overhaul its debt.

"The 'backing' of governments behind debt obligations could represent possible 'coupon buffers' and a signal of stability," said Guillaume Mascotto, head of ESG and investment stewardship at American Century Investments.

Nonetheless, the risk of state interference poses a dilemma for investors, especially for asset managers focusing on the environmental, social and governance (ESG) impact of their holdings, Mascotto said.

Corruption poses another headache. State-owned companies in nations with "high levels of perceived corruption" are one third as productive as their private sector peers, according to a recent report by the International Monetary Fund.

Emerging market assets were roiled by the fallout from the pandemic last year, which sparked billions of dollars in outflows. Bonds from fully state-owned companies moved broadly in lockstep with sovereign debt.

Around 90% of SOEs hold credit rating scores in line with their sovereign. Most divergences where the SOE is rated below the sovereign are investment-grade firms, where default probability differentials are negligible, calculates asset manager GMO.

The Petrobras shock may however test that close link.

If investors start questioning the ability and or willingness of the sole shareholder -- the government -- to support a company, yield spreads between the sovereign and the SOE could decouple.

"Increasing leverage on sovereign balance sheets might amplify this development," Thede Ruest, portfolio manager at Nordea, said.

The feedback loop can work both ways. Morgan Stanley (NYSE:MS) on Monday struck Brazil's sovereign bonds off its 'like' list, citing fiscal concerns and potential spillovers after Bolsonaro's push.

Investors' growing ESG focus is another source of pressure, said Ruest, who avoids quasi-sovereigns.

"Higher funding costs, as well as a global push to redirect capital towards business models supporting the U.N.'s SDGs (Sustainable Development Goals), might make refinancing more difficult for many of those issuers," he said.

($1 = 5.5308 reais)

Analysis: After Brazil ructions, a rethink for investors in emerging market state firms

Related Articles

Apple backs far-reaching emissions disclosure rules
Apple backs far-reaching emissions disclosure rules By Reuters - Apr 13, 2021 1

By Ross Kerber (Reuters) - Apple Inc (NASDAQ:AAPL) on Tuesday called for the U.S. Securities and Exchange Commission (SEC) to require companies to disclose emissions including...

Opendoor Gains After Cathie Wood's ARK Buys Shares
Opendoor Gains After Cathie Wood's ARK Buys Shares By - Apr 13, 2021

By Dhirendra Tripathi – Opendoor Technologies Inc (NASDAQ:OPEN) shares rose more than 4% Tuesday, buoyed by Cathie Wood’s Ark Invest active ETFs, which adding 633,400...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email