Indicator reflects cautious atmosphere in markets and follows depreciation of Brazilian currency, stocks
07/15/2022
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Brazil risk rose to 332 points on Thursday, according to IHS Markit — Foto: Silvia Zamboni/Valor
Brazil risk measured by five-year credit default swap (CDS) contracts reached the highest levels since May 2020 amid a risk-averse environment both abroad and in the domestic market. The Brazil risk rose to 332 points on Thursday, according to IHS Markit, which is now a part of S&P Global.
The worsening in country risk is recorded at the same time as other Brazilian assets are penalized. The future interest rates remain under pressure throughout the entire term structure of the curve; the foreign exchange rate is close to R$5.5 to the dollar; and the Ibovespa falls firmly – Brazil’s benchmark stock index was close to the 96,000-point threshold.
“The U.S. inflation figures continued to be very high. This generates discomfort and a feeling that the Fed [U.S. Federal Reserve] will have to raise interest rates more than it initially thought. When U.S. interest rates rise, it strengthens the dollar and makes stock markets more vulnerable,” says José Tovar, founding partner at Truxt Investimentos. “The market had calmed down, but with yesterday’s [Wednesday’s] inflation data, we had a new increase [in risk aversion].”
Mr. Tovar reveals Truxt’s multimarket funds are betting that U.S. and Canadian interest rates will rise and is long on the dollar against the real and the euro. “These are positions in the direction of more interest rates in the developed and emerging markets,” he says. As for Brazil, he points out that the measures adopted by the government have generated positive trends for the country’s growth this year. “But this drives inflation and forces the Central Bank to keep raising interest rates, which are likely to rise to around 14%” per year, he says.
Rogério Boueri, head of the Special Advisory of Economic Studies of the Ministry of Economy, said fiscal policy is not the reason for the higher Brazil risk measured by five-year CDS contracts, the worsening of the public debt financing conditions, the weakened real against the dollar, or stock market swings.
The CDS rate is rising for all countries, not just Brazil, he said. “International conditions are worse, but Brazil is in a better shape compared with emerging peers,” he said. “It is not a domestic fiscal problem in Brazil what is causing the worsening of the CDS.”
The “real problem” that explains this development, in the official’s view, may be the five-year nominal interest rate in the United States, whose average is at the highest level since 2008.
“Everyone is forecasting interest rate increases in the U.S., and this has an impact around the world, including in the [Brazilian] Treasury’s funding rate,” he said. “Brazil is not an island. We are impacted. But we are not the only ones.”
Despite the influence, Brazil’s nominal rates are not rising faster than the U.S. rates, he said. “We see stability in the rate differential with the U.S.,” he says. “Our rates go up domestically because of international conditions.”
To demonstrate this thesis, he says Brazil’s five-year nominal interest differential is lower than the average of two similar economies: Mexico and Colombia. The data shows an improvement in Brazil’s funding conditions, he said. Considering real rates for ten years, the differential of the funding rate between Brazil and the United States shows an improvement, according to him.
*By Victor Rezende, Lu Aiko Otta, Estevão Taiar — São Paulo
Source: Valor International