Brazil’s exports, international reserves curb country risk

The recent downgrades from credit rating agencies on Brazil did little to undermine the confidence of foreign investors.

Brazil’s country risk is still low—close to when the country enjoyed investment grade status (a guarantee that there is no risk of public debt default). Analysts believe that bulky international reserves and a good performance in exports have helped curb the risk.

Defined as the difference between the interest rate in Brazilian bonds overseas and bonds from the US treasury (calculated on a daily basis), the country risk serves to provide a gauge of the confidence of international investors. The greater the difference, the clearer the perception of risk. The indicator was created in 1992 by investment bank JPMorgan.

Brazil’s country risk closed out 2017 at a 240-point score. Last Wednesday (Apr. 18), the score stood at 244. The indicator showed that Brazilian bonds in circulation abroad were 2.44 percentage points higher than the equivalent bonds in the US—considered the world’s safest investment.

The level is similar to the one observed at the end of 2014, when Brazil still had investment grade status. Early in September, 2015, when Standard & Poor’s (S&P) became the first agency to strip the country of this grade, the rate reached some 390 points.

The score was 569 points in February 2016, and gradually retreated in the subsequent months, especially after ex-President Dilma Rousseff was ousted.

Rating

As it stands today, agencies S&P and Fitch rate Brazil three grades below investment status. The latest downgrades took place in January (S&P) and February (Fitch). The chief reason mentioned was the postponement of the approval of the country’s pension reform.

Moody’s is more optimistic in its assessment. In addition to having kept the country two notches below investment grade, it revised Brazil’s outlook to neuter this month, signaling it does not plan on changing the country’s rating in the coming months.

The economic growth forecast for 2018 and the possible approval of structural overhauls by the government are believed to ensure the rating holds steady.

Resilience

In the view of Newton Rosa, economist-in-chief of Sulamérica Investimentos, the fiscal difficulties of the government—which does not seem to be able to have the pension reform approved, and saw the provisional adjustment measures enacted late last year become void—are mitigated by the country’s position in the international market.

The international reserves, adding up to $383 billion, are more than enough to settle both the government’s and companies’ foreign debt—currently at $316.2 billion—helping keep the country risk at low levels.

“Despite the difficult fiscal situation, Brazil has a robust external sector. If foreign capital wants to leave the country, there are enough dollars to pay everyone. This keeps the international investor interested in the Brazilian economy,” the economist said.

Istvan Kasznar, professor of economics and international finance at the Brazilian School of Public and Business Administration of the Getulio Vargas Foundation (FGV/Ebape), agrees that Brazil’s foreign accounts are solid.

In his opinion, the diagnose by credit rating agencies is not always sufficient, as bankers looking to buy Brazilian bonds overseas do not take into consideration the country’s fiscal landscape alone.

“Indeed, Brazil’s not growing; it’s gliding. Its primary deficit stands at around $ 40 billion, and the government is facing political difficulties. On the other hand, the inflation is extremely low, and the country has exported a lot of oil, soybeans, and corn. The panel of international reserves formation is great. When the whole picture is considered, one element is combined with the other, one concludes that Brazil is more resilient under the external perspective than it may seem,” he explained.

Elections

On a possible surge in Brazil’s country risk as a result of uncertainties and turbulence surrounding the October elections, economists are divided. Newton Rosa maintains that expectations may deteriorate if the country’s new president does not commit to continuing the implementation of adjustment measures. The FGV professor, however, has a more cautious approach.

“Transnational [companies] complain about Brazil, but believe in it. The Central Bank availed itself of no stratagems to have international reserves burnt. Indeed, it’s impossible to predict what’s to come following the Brazilian elections. Political forces are volatile, but economic forces, the problems in Brazil and the world notwithstanding, are fortifying,” Kasznar said.