HALISTER1: Brazil Political Hopes Contrast With Debt Woes, Economists Say

Brazil Political Hopes Contrast With Debt Woes, Economists Say

(Bloomberg) -- BRL’s relative resilience in 2016 reflects outlook for political changes over the medium and long term, along with improving current accounts, despite fears Brazil’s debt load is becoming unsustainable, economists say.
  • Mkt sees Argentina’s President Mauricio Macri as potential example of what could happen in Brazil, said Carlos Kawall, chief economist at Banco Safra and former Brazil Treasury Secretary
    • Macri acted faster than expected to free the FX, cut spending and correct tariffs; “that shows that, after a political change, everything may happen fast”
  • Along with improving balance of payment, Banco Votorantim’s chief economist Roberto Padovani says Brazil’s mkt has priced in most bad news on fiscal and political issues
    • “The political crisis, in anyway, will be surpassed”
    • While it still may worsen, a “new political cycle” may start as soon as in 2016
  • Increasing consensus in Brazil over the need for pension regime reform to fix the budget and stabilize debt, despite the broad skepticism on govt’s ability to approve changes this yr, is also a positive: Kawall
  • Brazil’s current-account gap narrows; furthermore, high FDI shows recession isn’t preventing foreign investors from entering the country, Kawall says
  • BRL down 1.61% vs USD YTD, outperforming Latam peers such MXN and COP; Jan. 21 swap rates -79bps after BCB in previous meeting kept rates unchanged, suggesting local and external lower growth could help to stem inflation
  • Brazil debt as percentage of GDP has grown since 2012, 2nd year of Rousseff’s 1st mandate as president of Brazil
  • NOTE: In a Feb. report, Janus’ Bill Gross said Brazil is among examples of “addled” economies, and “no country over time can issue debt at 6%-7% real interest rates with negative growth. It is a death sentence”
  • Luis Stuhlberger, manager at Brazil’s Fundo Verde, told Valor that Brazil assets may drop further as debt increases if govt fails to approve reforms; fact that mkt is still not going for big short against Brazil is based on hopes current PT party will no longer hold power in 2018
    • Brazil mkt is split between worries of further asset deterioration and prospects of a bull market if pro- reforms leader wins 2018 elections; PT’s potential candidate Lula may be harmed by allegations linked to companies targeted by Carwash probe; Lula hasn’t been charged with any crime and has repeatedly denied wrongdoing
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Mauricio MacRi (Argentine Republic)
Carlos Kawall Leal Ferreira (Banco J Safra)
Luis Stuhlberger (Credit Suisse Hedging-Griffo Corretora de Valores SA)
Roberto Padovani (Banco Votorantim SA)
William Gross (Janus Capital Management LLC)

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