Brazil risk soars and analysts see little room for relief
The level of risk embedded in the prices of Brazil’s fixed income assets has hit multi-year highs in recent days, reflecting rising global uncertainties and a worsening fiscal outlook fueled by new billionaire spending on the eve of a tense election, with no truce sign on the near horizon.
Despite the hefty premiums, analysts are skeptical of short-term relief, as the events behind the downturn are likely to unfold in the coming months.
A source from the Ministry of Economy told Reuters, on condition of anonymity, that the reading is that the yield curve is “well pressed”, capturing all fears, but no positive surprises, as fiscal data is much better than the previous one. expected, in a context of the commodities boom that placed Brazil in a prominent position among emerging peers.
The government raised social benefits and cut taxes in effect until the end of the year, but the leaders in the presidential polls –Luiz Inácio Lula da Silva (PT) and Jair Bolsonaro (PL)– have already signaled their intention to maintain the values highest in 2023, when a re-discussion of the weakened constitutional spending ceiling is already expected, regardless of the winner.
“It’s a fiscal bomb,” said Sérgio Goldenstein, head of the strategy area at brokerage Renascença. “Risk premiums look high, but there is little room for a relevant drop.”
The demand for extra higher interest is reflected on several fronts. The real rate embedded in inflation-adjusted government bonds (NTN-B) with an average maturity of five years and traded on the secondary market has been around the highest levels since the end of 2016, well above 6% per year, at a time when the National Treasury reduced public bond offers in the face of price volatility.
Brazil’s five-year CDS – a derivative that acts as insurance against a debt default – has surpassed 300 basis points in recent days, peaking since the beginning of the Covid-19 pandemic in March 2020. On the rate curve futures of one-day interbank deposits (DI) of B3, all maturities bear interest above 13%, and mid-2023 vertices indicate an accumulated rate above 14% – the Selic is at 13.25% per year.
The inversion of the curve, expected in times of strong monetary tightening such as the current one, is already the smallest since last December, due to the firmer rise of long rates, more reactive to the external environment and the increased perception of domestic risk. “I am struck by this ‘flattening’ process (flattening of the curve) that we are seeing at a very high level, with rates in the range of 13% to 14% for terms of up to two or even three cycles of electoral policy and monetary policy for to be lived”, highlighted the chief economist at Ativa, Étore Sanchez.
Roberto Dumas, chief strategist at Banco Voiter, stated that, in addition to the external scenario, the Central Bank continues its aggressive monetary policy cycle while the government adopts an expansionary fiscal policy, with inflationary consequences ahead and direct impacts on the yield curve. fees. “The more one accelerates, the more the other has to step on the brakes. Everyone is expecting more and more that the Selic will rise more than expected”, said Dumas, who predicts the basic interest rate at 14.25% by the end of this year. The weakening of the credit profile hits the country at a time of strong interest rate adjustments in major global economies, which are battling inflation, but which, unlike Brazil, are still at the beginning of monetary tightening.