Brazil, once again considered the safe haven market for the emerging countries of Latin America
Brazil managed to avoid recession in the last quarter. The latest GDP figures showed a slight acceleration of growth with an increase of 0.4%. Whether or not this is a one-off case will be demonstrated by the actual figures. Brazil is still expected to finish the year with growth.
However, growth is weak and, at best, could only be moderately accelerated. In this sense, there are several factors that will now influence the future of the Brazilian economy and investment opportunities:
Bolsonaro's environmental policy may have long-term effects on the Brazilian economy. Currently, the international community is exerting a lot of pressure on the president to fight against illegal burning of forests and illegal logging, as the reduction of the Amazon rainforest can cause disastrous environmental effects.
Frankly, the social pressure is far more pronounced than the opposition the United States faces when President Trump allows national oil companies to explore natural parks in search of fossil resources.
However, the sustainability of corporate policies in emerging markets is generally not yet very advanced, although the pressure and constant requests from investors and institutions will change their focus and behavior.
High public deficit: the key for investors
The pension reform was passed in Parliament in August and now the Senate has time until 10 October to vote on it. In the short term, it would be out of the thinking of investors, however, it is a relevant issue, due to the huge fiscal cost of the deficit in the public system.
On the other hand, Parliament is currently debating tax reform. Brazil has a relatively high debt burden and cost savings are difficult, as much of the spending is committed by the Constitution, making it almost impossible to reduce the deficit in the long run.
Everyone agrees that pension reform is not the only solution to the debt problem. Higher growth rates are also needed for the country's rating to return to the investment-grade territory. In this sense, the investment community supports the Brazilian authorities in adopting the appropriate measures.
Will Argentina's political and economic situation affect Brazil?
So far, Argentina has been an isolated case in terms of political change and debt restructuring. This is confirmed by the risk spreads of sovereign debt as well as corporate bonds.
Brazil's 10-year sovereign bond trades at 4.5%, just +220 basis points versus the US Treasury. This is usually the risk spread for investment-grade issuers. As Brazil continues to maintain its BB- rating, within the high yield terrain, current risk spreads reflect investors' positive sentiment towards the country.
In August, some corporate bonds corrected several points. Given the situation of sovereign operations, corporate spreads on some issues seem relatively moderate and offer entry points, especially after the correction that affected credit spreads much more.
Thus, there is no short-term contagion effect extending to Brazil or any other country in the region. For this reason, Brazil is once again considered the safe haven market for the emerging countries of Latin America.
Source: Consenso del Mercado