{"id":91803,"date":"2024-11-11T17:35:51","date_gmt":"2024-11-11T20:35:51","guid":{"rendered":"https:\/\/murray.adv.br\/?p=91803"},"modified":"2024-11-11T17:35:54","modified_gmt":"2024-11-11T20:35:54","slug":"brazils-fiscal-risk-global-headwinds-keep-investors-on-edge","status":"publish","type":"post","link":"https:\/\/murray.adv.br\/en\/brazils-fiscal-risk-global-headwinds-keep-investors-on-edge\/","title":{"rendered":"Brazil\u2019s fiscal risk, global headwinds keep investors on edge"},"content":{"rendered":"\n
Post-U.S. election relief fades as currency, interest rates, and stocks remain pressured; Finance Ministry\u2019s fiscal package in spotlight<\/strong><\/em><\/h6>\n\n\n\n

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11\/11\/2024 <\/p>\n\n\n\n

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The post-U.S. election relief that buoyed Brazilian assets last week has now faded. As the government delays announcing the spending cuts promised by the Ministry of Finance, concerns about fiscal risk continue to mount, compounded by an increasingly challenging global backdrop. Early signs indicate that the Trump administration may adopt more protectionist trade policies, which, alongside recent disappointments in Chinese stimulus, is creating a harsher environment for emerging markets, pushing Brazilian assets to maintain high risk premiums.<\/p>\n\n\n\n

The currency\u2019s volatility illustrates the recent market instability. Last week alone, the exchange rate ranged between R$5.63 and R$5.83 per dollar, closing Friday in the middle of that band. Now that the post-Trump-election technical adjustment has passed, the market faces an adverse external outlook. Paired with Brazil\u2019s unresolved fiscal issues, these factors are driving higher risk premiums for domestic assets.<\/p>\n\n\n\n

The delayed release of Finance Minister Fernando Haddad\u2019s fiscal plan, aimed at maintaining the country\u2019s fiscal framework over the coming years, has fueled market uncertainty. Expectations that some previously expected programs may be dropped from the package add to investor unease.<\/p>\n\n\n\n

\u201cThe government must understand that the current debt-to-GDP trajectory is completely unsustainable. A primary deficit that appears small but is maintained through temporary measures will only lead to a massive nominal deficit,\u201d said Bruno Marques, partner and co-manager of XP Asset Management\u2019s multimarket funds. For Mr. Marques, the government should focus on more structural solutions to reduce debt levels. The external backdrop, marked by a strengthening dollar and rising interest rates, complicates matters further.<\/p>\n\n\n\n

The potential for the Trump administration to adopt a protectionist stance is already affecting financial markets. The possibility of Robert Lighthizer\u2019s return as U.S. trade representative has raised concerns that the threat of tariffs, a hallmark of Donald Trump\u2019s first term, could once again become reality.<\/p>\n\n\n\n

\u201cIf tariffs are imposed on Europe, China, and Mexico, this will strengthen the dollar and impact currencies worldwide,\u201d said Fernando Fenolio, chief economist at WHG. He added that rising external pressure calls for a reduction in the domestic risk premium, which is currently a primary factor in the Brazilian real\u2019s depreciation.<\/p>\n\n\n\n

\u201cIf we don\u2019t see improvement locally while global risks rise, the exchange rate will continue to depreciate, pushing beyond recent highs,\u201d Mr. Fenolio warned. \u201cWith the global environment under stress, investors will demand clearer and more stable local policy,\u201d he said, noting that even an increased interest rate differential between Brazil and the U.S. may not be enough to sustainably support the real.<\/p>\n\n\n\n

Last week, expectations were high for an announcement on the spending cuts package. Despite numerous meetings, the government failed to reach an agreement between the economic team and ministers from social sectors, who have resisted cuts to their budgets. Market concerns are growing over the likelihood of a watered-down spending reduction plan.<\/p>\n\n\n\n

\u201cWe\u2019re entering a phase where fiscal dominance is becoming a concern. In such cases, no interest rate can stabilize the currency because market players start doubting the government\u2019s ability to repay its debt,\u201d Mr. Fenolio explained. Typically, an interest rate hike would lead to currency appreciation, but in times of crisis, this relationship can reverse, as seen in 2014 and 2015. \u201cSince March, we\u2019ve seen this reversed correlation, with interest rates rising alongside a depreciating currency,\u201d he said.<\/p>\n\n\n\n

By the end of last week, Brazilian assets reflected high risk premiums across the board, even with expectations of an increased interest rate differential. The exchange rate hovered around R$5.73 per dollar, mid- and long-term interest rates neared 13%, and long-term inflation-linked bonds (NTN-Bs) remained above 6.5%.<\/p>\n\n\n\n

\u201cWe hope the package is announced soon. Overall, we expect the government to aim for the original fiscal framework\u2019s intent by implementing rules and restrictions to limit government spending growth to around 2.5%,\u201d said Tiago Berriel, chief strategist at BTG Pactual Asset Management and a former Central Bank director.<\/p>\n\n\n\n

In his monthly scenario review, Mr. Berriel noted that some elements being discussed are politically difficult to implement, such as changes to social spending. \u201cThe initiative is good, but we\u2019ll need to see if Congress will back it and if it\u2019s politically sustainable. It\u2019s quite challenging,\u201d he added.<\/p>\n\n\n\n

A favorable fiscal package could trigger a relief rally in Brazilian assets, \u201cbut any rally is likely to be temporary,\u201d said Paulo Clini, chief investment officer at Western Asset in Brazil. He noted that the strength of the U.S. economy and the outlook for higher long-term rates dampen foreign appetite for emerging markets, including Brazil. Without foreign investors, a sustained domestic rally seems unlikely.<\/p>\n\n\n\n

\u201cGlobal investors are holding back, and they typically drive the yield curve term structure. This trend isn\u2019t exclusive to Brazil but is impacting emerging markets broadly, including Mexico, Colombia, Chile, parts of Southeast Asia, and Eastern Europe,\u201d Mr. Clini said. Mr. Trump\u2019s policies, which could increase inflation and interest rates in the U.S., reinforce the concept of \u201cAmerican exceptionalism,\u201d he added.<\/p>\n\n\n\n

\u201cWith the \u2018Republican wave,\u2019 checks and balances are diminished. Trump holds considerable power, and a Republican Congress is unlikely to counterbalance his agenda,\u201d Mr. Clini explained. Given local investor concerns over fiscal policy and limited foreign interest in emerging markets, \u201cit\u2019s hard to believe that the market will recognize any excess in the risk premium soon,\u201d he concluded.<\/p>\n\n\n\n

There\u2019s also the chance that the government\u2019s fiscal package may disappoint, cautioned Fernando Rocha, chief economist at JGP. \u201cThe market will scrutinize the details. If we see R$50 billion in cuts, but only through superficial adjustments, the reception may not be favorable.\u201d<\/p>\n\n\n\n

*By Arthur Cagliari, Bruna Furlani, Gabriel Caldeira, Maria Fernanda Salinet, Victor Rezende \u2014 S\u00e3o Paulo<\/p>\n\n\n\n

Source: Valor International<\/p>\n\n\n\n

\nhttps:\/\/valorinternational.globo.com\/\n<\/div><\/figure>\n","protected":false},"excerpt":{"rendered":"

Post-U.S. election relief fades as currency, interest rates, and stocks remain pressured; Finance Ministry\u2019s fiscal package in spotlight 11\/11\/2024 The post-U.S. election relief that buoyed Brazilian assets last week has now faded. 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