March 30, 2017 / 3:41 PM / 10 months ago

Fitch: Meat Scandal Could Have Effects On Brazil Banks, States

(The following statement was released by the rating agency) NEW YORK/SAO PAULO, March 30 (Fitch) The negative effects of Brazil's "Carne Fraca" (Weak Meat) investigation into corrupt practices in the country's protein industry may carry over into some domestic banks and local governments in 2017, says Fitch Ratings. However, the risks should not be systemic and spillover effects are likely to be manageable. Fitch maintains that the long-term risks from the corruption investigation will be limited so long as this process remains contained to the existing plants already implicated. It is still too early to assess the ultimate financial and economic effects in terms of corporate fines and regulatory sanctions and the potential impact on meat consumption and exports as the Carne Fraca investigation is still ongoing. However, federal government statements indicate that the scope of the investigation may not be significantly expanded. Initial import bans on Brazilian meat from key markets, including China, have also been rescinded. Fitch has not changed its base case scenario for banking sector loan-loss provisioning due to the recent meat scandal. However, our worst-case estimates of additional provisioning systemwide, considering the whole agribusiness chain, could reach BRL15bn (USD4.76 billion) in 2017 if the investigation is significantly expanded and has a material financial impact on the protein sector. Total loan-loss reserves have already been forecast to rise in 2017 after increasing to an estimated BRL144bn at year-end 2016. Public sector banks would likely be more exposed if the meat sector were to experience a wider risk scenario of losses. Fitch would expect increased provisioning to be more concentrated in these banks relative to large private banks. Nevertheless, given that public banks' Issuer Default Ratings are driven by the sovereign rating, we are not currently expecting rating implications from a worst-case risk scenario. On a systemwide basis, a BRL15bn increase in provisioning should be manageable. Such a scenario would not likely materially affect the banks' liquidity and capitalization, which remains strong and has improved as a result of deleveraging in recent years. Such a scenario would present another challenge to the banking system's gradual recovery process, which continues to face risks in several areas stemming from a protracted recession in 2015-2016. For Brazil's local governments, the effects of the Carne Fraca investigation should be similarly limited so long as it remains contained. However, some states could be relatively more affected, especially under a worst-case scenario of a prolonged investigation that significantly encompasses more meat production plants. Parana is a case in point. Despite minimal direct tax revenues from the protein sector, other sectors such as packaging, feed, machinery, retail and utilities would see revenues affected should the investigation cause a prolonged and more systemic shutdown of the protein sector. Fitch estimates that less than 5% of Parana's tax revenues could potentially be affected in such a case and would not necessarily have rating implications on the state's creditworthiness. There would also be some tertiary effects on the economy from a reduction in employment, which would weigh on consumption and incomes. Contact: Claudio Gallina Senior Director, Financial Institutions +55 11 4504 2216 Fitch Ratings Brasil Ltda. 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