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S&P Global — 26 May, 2020

COVID-19 Daily Update: May 26, 2020

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By S&P Global

While Asian countries, E.U. nations, and U.S. states piece together playbooks for reopening their respective economies, Latin America is facing the worst of the pandemic as infections surge across the region.

“In a sense, South America has become a new epicenter for the disease,” Mike Ryan, the World Health Organization’s emergencies program director, said at a news conference on May 22. “We’ve seen many South American countries with increasing numbers of cases, and clearly there’s a concern across many of those countries, but certainly the most affected is Brazil at this point.”

Since Brazil confirmed its first infection in São Paulo on February 26, approximately 375,000 cases have been reported in the country, the second-highest total of infections worldwide behind the U.S., according to Johns Hopkins University data. Experts believe the total is dramatically higher due to underreporting in the rainforest communities, provincial towns, and favela settlements. The rural Brazilian state of Amozonas has the highest infection rate of the country, according to the WHO. This highlights how “we are seeing a greater impact in terms of disease, disease severity, [and] poor outcomes in groups that are vulnerable” and facing inequalities, Dr. Maria Van Kerkhove, the organization’s technical lead for the coronavirus response, said on May 22.

The 2014-2016 economic crisis in the country exacerbated conditions for populations of low socioeconomic status. According to the World Bank, Brazil’s poorest 40% across every state had lower incomes in 2018 than during the recession in 2014. Income equality in Brazil spiked last year to the highest levels seen since 2012. Now, the COVID-19 crisis will have an outsized adverse effect on such at-risk people.

Energy and business sectors within the country are also navigating the economic uncertainty and market volatility brought on by the current crisis.

According to S&P Global Platts, hydrous ethanol prices in Brazil’s Center-South assessed on May 21 were seen to have experienced a fraction of the notably larger positive price move, which has almost doubled during the previous four weeks, seen across international energy markets. Additionally, when the Brazilian Real to U.S. dollar exchange rate strengthened in May, Brazil free-on-board ethanol prices rallied from the year's lows. Because the most recent price data on the Brazilian Real to U.S. dollar exchange rate has a current 100-day historic volatility of 20% (compared to the U.S. Dollar Index having a 100-day historic volatility of 9.2%), within the next 100 days the Brazilian Real could have a potential trading band of Real 6.67/$1 USD or Real 4.45/$1 USD. The daily movements of the exchange rate equate into relative percent price swings in the Brazilian ethanol FOB priced in U.S. dollars.

Brazilian banks’ first-quarter results showed the pandemic’s pain, although the brunt of its implications had yet to reach Latin America. Three of the largest banks in country—Banco do Brasil S.A., Banco Bradesco S.A., and Itau Unibanco S.A.— significantly increased their provisions for credit losses, thus jeopardizing their bottom-line results, according to S&P Global Ratings. Banks' asset quality is expected to decline in the second quarter of this year, and companies in vulnerable sectors, including importers due to Brazil's sharply weaker currency, are likely to still suffer. 

S&P Global Ratings expects Brazil will see a moderate economic recovery next year. Still, the Latin American nation’s net general government debt could increase approximately 10 percentage points to 66% of GDP this year due to deterioration of the country’s public finances prompting higher spending and revenue shortfalls. On April 6, 2020, S&P Global Ratings affirmed its ‘BB-’ credit rating on Brazil and revised the outlook from positive to stable, due to the pandemic’s adverse effects on the country’s GDP growth and fiscal performance this year alongside slower-than-anticipated progress on its economic reform agenda. S&P Global Ratings also revised the outlooks from positive to stable on 15 financial institutions in Brazil, following the same action on the sovereign.

Additionally, S&P Global Ratings forecasts this year Brazil’s GDP will contract 4.6% and the Latin American region GDP as a whole to shrink 5.2%. Recoveries across the region are anticipated to be uneven, as some countries, like Chile and Peru, have responded with more robust economic responses and effective virus-containment measures, while others, like Mexico, have implemented weaker stimulus measures to fight the coronavirus-cased downturn.

Prior to the pandemic, the region’s economic and fiscal outlook was already weakened. S&P Global Ratings currently has selective default ratings on three countries in the region: Argentina, which defaulted before the pandemic and subsequent global economic downturn in August 2019, and then defaulted again on additional debt in December 2019, January 2020, and April 2020; Venezuela, which has had this rating since 2017; and Ecuador, which was rated selective default in April 2020 due to the pandemic.

Political disagreements across Brazil’s government and cabinet have intensified in recent weeks and could complicate their continued coordinated COVID-19 response. President Jair Bolsonaro faced criticism for minimizing the severity of the coronavirus and for joining anti-lockdown protesters at rallies. More recently, critics have scrutinized his removal of health ministers from government and requirement for the country’s doctors to recommend hydroxychloroquine, a malaria drug that is not proven to prevent or aid symptoms of COVID-19 and has been found to increase risk of death, as the healthcare system in São Paolo is close to collapsing.

“We have to be brave to face this virus. Are people dying? Yes, they are, and I regret that. But many more are going to die if the economy continues to be destroyed because of these [lockdown] measures,” President Bolsonaro said on May 14.

On Sunday, U.S. President Donald Trump suspended travel into the U.S. from Brazil to “help ensure foreign nationals who have been in Brazil do not become a source of additional infections in our country,” White House press secretary Kayleigh McEnany said in a statement, adding that the order does not apply to trade between the U.S. and Brazil.

Today is Tuesday, May 26, 2020, and here is today’s essential intelligence.

Uncertainty Across the Global Economy

Credit FAQ: How The COVID-19 Pandemic Has Affected Sovereign Creditworthiness In Latin America And The Caribbean

Given the COVID-19 pandemic and resulting global economic recession, S&P Global Ratings has recently reviewed most of its sovereign ratings, which has led to a number of rating actions. A disproportionately large number of the recent downgrades and negative outlook revisions have been on sovereigns in Latin America and the Caribbean. This is largely because many of these sovereigns' economic and fiscal profiles were already quite weak prior to the pandemic. This FAQ answers some questions S&P Global Ratings has been receiving regarding Latin American and Caribbean sovereign ratings.

—Read the full report from S&P Global Ratings

The Seven Key Questions We Ask About Eurozone Government Debt Profiles

Since eurozone governments put their economies into lockdown in mid-March, S&P Global Ratings has sharply lowered our European macroeconomic forecasts, reflecting the expectation that the pandemic will do more damage to economic growth and public finances than the 2008-2010 global financial crisis. Despite S&P Global Ratings' projection that average eurozone government debt will increase by just under 15 percentage points of GDP this year, we have recently affirmed our ratings on Austria, Spain, Belgium, Germany, France, Greece, Italy, and Portugal. This is because, in S&P Global Ratings' view, monetary flexibility and economic resilience play a larger role in a country's ability and willingness to service debt than a single year's fiscal outcome. While debt to GDP is on the rise, debt-servicing costs continue to decline, benefiting eurozone creditworthiness.

—Read the full report from S&P Global Ratings

Overview Of International Public Finance Rating Actions Since March 10, 2020

S&P Global Ratings has reviewed almost one-third of its international public finance (IPF) ratings globally since early March, when lockdown measures started sending economies across the world into severe recessions.S&P Global Ratings analyzed the trajectory of the ratings assuming that the COVID-19 pandemic would peak in mid-2020 with an economic recovery starting late in 2020 and 2021. Of the ratings reviewed, S&P Global Ratings affirmed 60%, revised the outlook on roughly a quarter to negative, and lowered another 8%. Across the 363 IPF entities S&P Global Ratings rates on a global scale, 16% of ratings have a negative outlook, against 7% with positive outlooks.

—Read the full report from S&P Global Ratings

Economic Research: China's New Stop-Go Cycle

China is living through another stop-go cycle even though the stop, COVID-19, is different this time. Over the weekend, policymakers said they aren't setting a GDP growth target this year. The new target is jobs but a sluggish service sector means a slow jobs recovery and more stimulus. Financial conditions confirm stimulus is arriving. This will lift growth for a while (S&P Global Ratings' forecasts are 1.2% for 2020 and 7.4% for 2021), but a tightening will follow in 2021.

—Read the full report from S&P Global Ratings

Market Dynamics Amid CARES Act Influx

How is COVID-19 relief impacting U.S. market segments? S&P DJI’s Gaurav Sinha takes a closer look at fixed income spreads, small- and mid-cap equities, and a potential role for the quality factor moving forward.

—Watch and share this video from S&P Dow Jones Indices

Banking Sector Under Pressure

Diverging regulators, timing hitches make Nordic loan loss comparisons difficult

Timing challenges and diverging regulatory approaches to IFRS 9 have led to variations in Nordic banks' expected loan losses in their first-quarter results, making it difficult to compare how vulnerable they are to the coronavirus crisis. One inherent feature of IFRS 9, an accounting standard implemented in 2018, is that it requires banks to take a forward-looking view and apply macroeconomic forecasts when estimating expected credit losses, or ECL. This leaves room for interpretation, particularly given there is uncertainty about what impact the crisis will have on the economy, said Anders Torgander, a financial services partner at KPMG in Sweden.

—Read the full article from S&P Global Market Intelligence

Singapore banks seen facing lingering default risk in oil sector

Recent financial failures and scandals of Singapore's commodities traders, triggered by the oil price crash this year, highlight a lingering loan-loss risk facing major banks in the city-state. At least four commodities traders in Singapore — Hin Leong Trading (Pte.) Ltd., Zenrock Commodities Trading Pte. Ltd., Hontop Energy (Singapore) Pte. Ltd. and Agritrade Interntional Pte. Ltd. — were put under receivership or judicial management by their creditors this year, according to company statements and media reports. The sudden and sharp decline in oil prices induced by the pandemic has hit their cashflows or uncovered allegedly fraudulent practices. DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. Ltd. and United Overseas Bank Ltd. were hurt by a slew of loan losses in 2015 when falling oil prices hit the offshore energy services sector. These banks may now face another round of rising loan losses if oil prices continue to be volatile or the global economy takes much longer to recover from the pandemic, analysts said.

—Read the full article from S&P Global Market Intelligence

China asks banks to up lending, relief to small business despite rising defaults

The Chinese government wants large commercial banks in the country to increase lending to small businesses by more than 40% in 2020 from a year earlier, as part of the nation's efforts to help support borrowers with weak credit profiles during the pandemic-induced economic slowdown. In a policy address at the annual session of the National People's Congress on May 22, Chinese Premier Li Keqiang added that banks can now let small businesses pay only the interest on loans until end-March 2021, according to a transcript in Chinese posted by Xinhua News Agency. Li also encouraged corporations to turn to the bond market for funding, a move that could enable more bank lending to small businesses and rural borrowers with limited funding channels.

—Read the full article from S&P Global Market Intelligence

ESG in the Time of COVID-19

US government action to protect power grid potentially impacts energy storage

US energy storage market participants operating at the bulk power system level should evaluate their supply chains and take other measures in light of recent US government action to protect national security by limiting equipment transactions involving foreign adversaries, experts said Thursday.

—Read the full article from S&P Global Platts

Citing COVID-19, US senators call for tweaks to renewable energy tax credits

Citing a large number of wind and solar farms hit by "COVID-19 related disruptions," three Republican senators have asked U.S. Treasury Secretary Steven Mnuchin to expand on his department's prior commitment to modify tax incentives for eligible projects. In a May 21 letter, U.S. Sens. Lisa Murkowski, R-Alaska, Susan Collins, R-Maine, and Thom Tillis, R-N.C., asked Mnuchin to extend safe harbor requirements for both the investment tax credit and the production tax credit, critical incentives for solar and wind installations. Specifically, the senators asked for an extension of "start of construction" requirements and a modification of a "physical work test" to allow developers to qualify for the tax credits. Earlier in May, the Treasury Department said in a letter to Sen. Chuck Grassley, R-Iowa, and other lawmakers that it planned to "modify the relevant rules ... in the near future."

—Read the full article from S&P Global Market Intelligence

Seeking emissions cuts, CenterPoint reboots Minn. renewable gas push

CenterPoint Energy Inc. could make Minnesota a bigger player in the U.S. renewable natural gas market as the Houston-based multiutility presses forward with efforts to reduce greenhouse gas emissions. Its Centerpoint Energy Minnesota Gas subsidiary has proposed a plan that would encourage more Gopher State production of renewable natural gas, or RNG, by allowing producers to ship biogas through CenterPoint's distribution system. Meanwhile, a company-backed bill that would create a framework for alternative fuel sales to Minnesota gas customers is advancing through the state legislature.

—Read the full article from S&P Global Market Intelligence

Greek power demand down 13% in April as renewables thrive

Greek electricity demand fell 13% in April on a year on year comparison as renewables all but matched gas-fired generation on the supply side, according to data from the Energy Exchange Group. With lignite generation collapsing, the key relationship in Greece's generation mix is no longer between gas and lignite, but between gas and renewables. Combined wind and solar generation has consistently exceeded 1 TWh/month this year and could quite possibly surpass gas-fired generation for the first time over a full month in August. For April gas met 35.4% of national net power demand, renewables 34.6%, imports 22.1%, hydro 4.7% and lignite just 3.1%.

—Read the full article from S&P Global Platts

The Future for Energy and Commodities

Mining Exploration Insights – May 2020

With disruptions to mining operations now appearing to be less severe than some had initially feared, mining equities recovered somewhat in April, as S&P Global Market Intelligence's aggregate market value of the industry's listed companies, based on 2,331 firms, rose 18% month over month to US$1.24 trillion. The aggregate market cap of the industry's top 100 companies was up 17% in April at US$1.05 trillion. The number of tracked mining companies remains at a 10-year low, declining steadily from a high of 2,921 companies in March 2012. This analysis is an extract of S&P Global Market Intelligence monthly Industry Monitor, which reviews exploration activity and development in the mining industry.

—Read the full report from S&P Global Market Intelligence

Iranian gasoline starts to arrive in fuel-starved Venezuela

An Iranian tanker carrying gasoline has arrived over the weekend in Venezuelan territorial waters as the country deals with severe fuel shortages and US sanctions. The clean tanker Fortune -- laden with 30,000 mt of gasoline -- was north of the Venezuelan port of Puerto La Cruz as of Sunday morning, data from Platts trade flow tool cFlow showed. The Iranian Embassy said late Saturday in a tweet that one of its tankers arrived in Venezuelan waters escorted by the country's navy. This was also confirmed in a tweet by Venezuela's new oil minister Tareck El Aissami. The shipment comes amid rising political tensions between the US and the two OPEC members. US sanctions against both Iran and Venezuela have had a severe impact on their oil sectors. US officials have been watching reports of the Iranian gasoline shipments to Venezuela but have so far not taken any action to block them.

—Read the full article from S&P Global Platts

INTERVIEW: Iran's deputy oil minister sees 'hardened' diplomacy environment

For decades, through military wars and oil price wars, Iran has entrusted much of its OPEC relations to its longstanding diplomat Hossein Kazempour. As Iran's OPEC governor, Kazempour played an instrumental behind-the-scenes role in the organization's often fraught negotiations on production policy, aiding a succession of oil ministers. The well-respected Kazempour's death on May 16 leaves major shoes to fill at a critical time, with the coronavirus pandemic wreaking havoc on the global economy and the US applying its "maximum pressure" sanctions campaign on Iran. For now, Amir Hossein Zamaninia, Iran's deputy oil ministry for trade and international affairs, is filling the OPEC governor role on an interim basis, while a search for an official successor is underway. Platts spoke with Zamaninia about Iran's OPEC relations, how it is managing under US sanctions and the outlook for the oil market. The transcript below has been lightly edited for clarity and length.

—Read the full article from S&P Global Platts

Canadian gas exports to US likely to remain low well into June: Platts Analytics

Below-normal exports of Canadian gas to the US Pacific Northwest and Midwest are likely to continue well into June as AECO basis continues to strengthen and incentivize storage injections in Alberta, according to S&P Global Platts Analytics. Exports to the US Pacific Northwest through Kingsgate have run under capacity this summer. While the market was previously expecting these flows to pick up by June, sentiments are now skewing toward this underutilization continuing throughout the month.

—Read the full article from S&P Global Platts

Coronavirus pandemic is upending US energy markets heading into summer: FERC

The Federal Energy Regulatory Commission said in a summer outlook that it expects weak energy market conditions to continue due to the coronavirus pandemic. Oil markets are being hit hardest, but power markets also are experiencing lower loads and prices, and natural gas markets are likely to see even lower prices this summer than last. "The most impacted market so far has been the oil market," FERC staff member Alec Stirling said in a podcast released May 21 that summarizes the results of the Summer Energy Market and Reliability Assessment.

—Read the full article from S&P Global Platts

UPDATE: Offshore oil producers eye shut-ins to weather different kind of storm

As global oil demand remains stunted by the COVID-19 pandemic and the measures being taken to prevent its spread, producers across North America are pursuing ways to curtail output to help rebalance the market. Many onshore producers have shut in supply at the wellhead, but offshore operators in the U.S. Gulf of Mexico might not have the same degree of flexibility. "It's, actually, maybe just a little bit trickier," Talos Energy Inc. President and CEO Timothy Duncan said during a May 7 earnings call.

—Read the full article from S&P Global Market Intelligence

Listen: US power sector known for reliability, contingency planning faces challenges from coronavirus

The US power sector is known for its high level of reliability and focus on contingency planning and redundancies, but what happens when working next to your colleague suddenly becomes a health hazard? Scott Aaronson, vice president of security and preparedness for the Edison Electric Institute, talks with Jasmin Melvin of S&P Global Platts about emergency preparedness for utilities and the challenges ahead for the industry.

—Listen and subscribe to Commodities Focus, a podcast from S&P Global Platts

Written and compiled by Molly Mintz.