Brazil needs reforms – BNY Mellon

BNY Mellon’s EM specialists take a look at the case for Brazil following the country’s downgrade to ‘junk’ status by Standard & Poor’s.

Reviving the economy through necessary reforms

By Javier Murcio, director of emerging markets at Standish Mellon Asset Management

“The rationale behind the rating highlights the rapid deterioration, over the course of less than two months, in the fiscal situation and the implicit confirmation that the political ability to introduce serious reforms is non-existent. Debt dynamics suggest a worsening of debt ratios and S&P’s outlook, similar to ours, is for a lack of improvement in the foreseeable future.

“This is not to say there are no solutions to Brazil’s current quandary. The absence of a strong political commitment makes it difficult to make serious cuts, although there is hope that the downgrade would put pressure on politicians to approve necessary reforms.”

Meanwhile, Carl Shepherd, portfolio manager within Newton’s Fixed Income team, states there are good reasons to retain at least some exposure to Brazilian debt.

A brighter outlook for Brazil

By Carl Shepherd, emerging market fixed income manager at Newton Investment Management

“The debt issue remains investment grade since it was only Brazil’s foreign currency bonds which were the subject to the S&P downgrade. On the question of liquidity, the issue is around $2bn in size (similar in size to a typical US Treasury bond) with large trading volumes and participation by large pools of liquidity from local insurance funds and pensions.

“I believe the downgrade was driven by an admission by the finance minister that the primary surplus target will be missed, which would thus entail a higher government debt trajectory for the country. The government does remain solvent and I have little concern over their ability to meet obligations.”

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