Brazilian stocks rode a “wave of optimism” to a record high last year, says Marcelo Azevedo in Folha de S. Paulo. Markets were relieved that the newly installed left-wing administration of Luiz Inácio Lula da Silva had promised to keep spending under control. This year has been trickier. In January it was apparent that US interest rates would stay higher for longer. That has squeezed emerging markets such as Brazil, which struggle to attract the attention of US-based investors when dollar bonds are already paying well. In April, Brazil’s government compounded the problem by relaxing fiscal targets, further spooking investors.
Are investors losing confidence in Brazil?
The local bovespa stock index has dropped by 5% this year, while the real has been among the worst-performing emerging market currencies this year. A bigger welfare budget has seen state spending rise by 6% above inflation since Lula took office, Rafaela Vitoria of Banco Inter tells the Financial Times. Brasilia has backpedalled on pledges to achieve a primary budget surplus (meaning that government tax revenue exceeds expenditure, excluding interest costs), say Michael Pooler and Beatriz Langella, also in the Financial Times.
At 76% of GDP, Brazilian public debt is already high for an emerging economy. Brazil is in a more precarious position than its peers, Thierry Larose of Vontobel Asset Management tells Craig Mellow in Barron’s. “Debt service already eats up nearly 30% of Brazil’s state revenue, compared with 15% for Mexico.” Instead of tightening the purse strings, Lula’s first instinct has been to blame the central bank for supposedly keeping interest rates too high.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
“Global investors have soured on the Brazil story”, but on an average of just 7.5 times earnings – a roughly 25% discount to the historical average – the market does contain some “deep value plays”. And, as Larose notes, “Lula has a track record of shifting pragmatically before things get out of control”.
The president may have just pulled off one such pivot, says The Economist. Between 1 January and mid-June, the real had plummeted by 17%, but Lula has since thrown his weight behind finance minister Fernando Haddad, who wants to keep spending tight. That has calmed markets, helping to spark a mini-rally in Brazilian assets in recent weeks.
An immediate crisis is not imminent. The “central bank has $360 billion in reserves” and “almost all the public debt is in local currency”. But an economic model built on “high commodity prices” and “subsidies to favoured businesses” will do nothing to cure “stagnant” productivity or improve the “deficient” education system and infrastructure. The population is ageing and pensions already account for “44% of federal spending”. Brazil is “walking on the financial wild side”.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
Action Fraud issues pension scams warning as fraudsters steal ‘£50k a day’News Figures from the UK’s leading anti-fraud agency suggest pension scams have been on the increase since the cost of living crisis. Here’s how to keep your nest egg safe.
-
Will Labour U-turn on Winter Fuel Payment cut?The Winter Fuel Payment cut proposed by Labour has proved divisive, and pressure is mounting ahead of a vote in the House of Commons tomorrow
-
Why are tourists a problem around the world?Tourists are good for the economy, but not always for residents, says Alex Rankine
-
Ukraine invades Russia – what are the political implications?Ukraine's surprise invasion into Kursk could change the course of the war politically
-
UK stocks have become a global favourite – should you invest?The world is taking to UK stocks – but how long will it last?
-
Middle East conflict: will it escalate?Fears of a wider Middle East war are well-founded. What's happening and why?
-
Will central banks cut interest rates?Central banks shouldn’t rush to lower interest rates, but it seems likely that they will cut further than expected
-
Why is the Japanese yen weak?The yen has weakened far more than expected, even though the economy and stocks are looking much healthier
-
Maduro clings to power in Venezuela – can he last?While Maduro clung to his presidential seat, Venezuela's election protests paint a different picture
-
Could Kamala Harris be America's next president?Kamala Harris is yet to become the Democratic nominee – but when she does, can she beat Trump?
