The Brazilian real has been in fast retreat for the last few months with a tumble that only the South African rand has managed to supersede. Investor interest in Brazil has waned as financial ratios have deteriorated, the outlook on its rating has become more negative and the government continues to mismanage the macroeconomy and meddle in sectors.
Relief for the currency is likely soon. Futures suggest interest rates will be pushed to 10.5% at the next meeting of the Central Bank committee, always a substantial support for the currency. At that level, it would help bring back foreign investors particularly the Japanese who are big buyers of the juicy yields on Brazilian paper especially when compared to the thin pickings to be had on Yen rates. The surge in issuance overseas by Brazilian companies suggests that they are confident that the currency is likely to hold its own against the greenback.
That leaves the question of a possible downgrade, which would leave Brazil worryingly near a sub-investment grade rating. That is unlikely to happen as the government seeks a slightly more market friendly tone. Marcio Guedes, a director at the association of investment banks Anbima, for one is sanguine. “The risk is there but the government has realised that and is expected to act to avoid the political fallout of a possible ratings cut.”
The wildcard in all this? Elections in October that turn out to be too close to call and trigger a government splurge and further investor nervousness.