External scenario should continue to play relevant role in the real’s performance, while commodity prices and trade balance may not provide same support as last year
01/30/2024
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Eduardo Miszputen — Foto: Carol Carquejeiro/Valor
Although Brazil remains a standout among emerging markets and has recently been the focus of foreign investors, the country is unlikely to attract capital flows that would push the exchange rate much higher, said Eduardo Miszputen, the head of global markets at Citi Brazil. He believes that the external scenario should continue to play a relevant role in the real’s performance, while commodity prices and the trade balance may not provide the same support as last year.
“The year 2024 should be a bit of a repeat of 2023, with external factors providing more stability to the local market than internal factors,” he told Valor. In this sense, the evolution of interest rates in the United States, which has been a daily topic for global financial assets since the turn of the year, should remain relevant.
“We still have two wars going on, and there is a risk that these conflicts will escalate. Another factor that could cause instability is the U.S. election at the end of the year,” he said.
“Apart from that, the U.S. interest rate environment and the U.S. economy itself should bring uncertainties that will create some volatility in the markets,” said Mr. Miszputen. Since the beginning of the year, the domestic exchange rate has relied on expectations for U.S. interest rates, and as a result, the correlation between the performance of the real and the behavior of short-term Treasuries is quite high. Year to date, the dollar has appreciated 1.91% against the real.
As for Brazil, the executive sees a more stable scenario, although it is not yet able to attract a strong flow of foreign capital. For Mr. Miszputen, Brazil has attracted attention among emerging markets because it has opportunities for growth; some economic and fiscal stability, with reforms being made; an interest rate that should remain high; and a strong trade balance. “We are likely to become a pillar of stability, because we are far away from wars and the effects of these conflicts.”
“I think Brazil is consolidating itself as one of the most interesting emerging markets for foreign investors. Unfortunately, we are still far from investment grade. I think this is the big obstacle to an additional flow of investors into Brazil,” said Mr. Miszputen. He points out that credit rating agencies such as S&P Global and Fitch upgraded Brazil’s credit rating last year, but the country’s sovereign rating remains two notches below investment grade.
Citi, which topped the ranking for foreign exchange services to clients in 2023 for the fifth year in a row, believes that a tougher stance by the government on fiscal matters could improve perceptions of Brazil and thus increase the flow of foreign capital. “People understand that there can be some leeway and that the government is interested in social initiatives and policies. This is understandable, but obviously a greater rigidity on public accounts would lead to a better perception of the country,” he said.
The executive said that, at least for now, he doesn’t see the evolution of the debt bringing or taking money out of the country if the government maintains its plans in line with market expectations. “Today, foreign ownership of Brazilian debt is around 9.5%, a relatively low level historically. That’s why I don’t see a significant volume of outflows, even if there is a fiscal deterioration,” he said.
As for the impact of a narrowing of the interest rate differential between Brazil and the U.S., Mr. Miszputen points out that even if the Selic policy rate continues to fall, the Fed funds rate should also start to fall, and as a result the interest rate differential could remain at 5 to 6 percentage points, which would continue to be attractive to foreigners.
“If there are no major surprises, the carry trade strategy in Brazil for 2024 will be a very positive operation in terms of financial results,” he said. “We think interest rates here will fall to 10%. If that happens, and if the U.S. starts cutting rates there, we won’t have a change that will affect the appetite for investment in Brazil or the withdrawal of investment.”
*Por Arthur Cagliari, Victor Rezende — São Paulo
Source: Valor International