Default-Swap Traders Rattled by Rousseff Re-Election OddsDavid Biller and Matthew Malinowski
Traders are becoming increasingly bearish on Brazil’s creditworthiness as speculation builds that Dilma Rousseff, who has presided over an economy plagued by inflation and weak growth, may win a second term with elections just eight weeks away.
The cost to protect the nation’s debt securities against non-payment for five years rose to a four-month high after polling this month showed Rousseff holding onto her lead before presidential elections in October. Credit-default swaps declined earlier this year as previous polls among potential voters indicated that her support was waning.
Rousseff’s administration has given up billions of dollars through tax cuts on goods from furniture to automobiles to boost an economy that has expanded less during her tenure than at any time in two decades. While second-place candidate Aecio Neves has become more popular among voters, he has failed to beat her in surveys this year as he pledges to contain public spending and accelerate growth.
“Things will get better with Aecio and things will get worse with Dilma,” Paulo Petrassi, a fixed-income trading manager at Leme Investimentos, said by telephone from Florianopolis, Brazil. “As the outcome is indefinite, it’s worthwhile to have protection.”
The course of the election was altered today after presidential candidate Eduardo Campos died in a plane crash following an aborted landing because of bad weather. Campos was polling in third place ahead of the October elections.
The most recent voter poll, conducted by public opinion research company Ibope from Aug. 3 to 6, showed support for Rousseff in the Oct. 5 election was unchanged at 38 percent, Neves’s backing rose one percentage point to 23 percent. Campos received 9 percent support, according to the poll, which had a margin of error of plus or minus two percentage points.
The presidential press office didn’t immediately provide comment on Rousseff’s prospects in the election and the nation’s perceived creditworthiness when contacted after business hours.
After falling to a more than a one-year low last month, five-year credit-default swaps surged, reaching 167 basis points on Aug. 8, the highest since April 3. Swaps have declined 43 basis points this year to 150 basis points as of 3:33 p.m. in New York as surveys conducted by another polling company, Datafolha, show Rousseff’s lead slipping. A basis point equals 0.01 percentage point.
The benchmark Ibovespa stock index, which has declined 19 percent since Rousseff entered office in 2011, fell 1.1 percent on Aug. 8, the biggest drop in more than a week.
Standard & Poor’s in March lowered its debt rating on Brazil by one level to BBB-, a step above junk, on slower economic growth and what it said was deteriorating fiscal accounts. The move ended a decade-long stretch of upgrades for the world’s second-largest emerging market.
Since the downgrade, Brazil has twice reported primary budget deficits, which excludes payments on interest. The surplus as a percentage of gross domestic product in the 12 months through June was 1.36 percent, compared with 1.52 percent the prior month. The government said in February it is targeting a 1.9 percent surplus for 2014.
The Finance Ministry’s press office didn’t respond to requests for comment on whether it would meet its fiscal goals.
“There’s no way they’re going to get close to the target, especially since the revenue growth just remains sluggish because the economy is sluggish,” Edwin Gutierrez, who manages $13.5 billion in debt from emerging markets including Brazil for Aberdeen Asset Management Plc, said by phone.
The economy expanded 0.2 percent in the first quarter, about half the pace of the previous three months. In her first three years in office, Rousseff has delivered the weakest growth of a Brazilian leader since Fernando Collor stepped down in 1992. Economists surveyed by the central bank have cut 2014 growth forecasts for 11 straight weeks to 0.8 percent, less than one-third the 2.5 percent pace recorded last year.
“The government is starving for revenue,” Marcelo Assalin, who oversees $3 billion of debt from emerging markets including Brazil for ING Groep NV, said by phone. “Investors are concerned about the fiscal deterioration in Brazil, and things are not improving. They’re getting worse.”