In a Yield-Starved World, No One Wants Brazil’s 12% RatesFilipe Pacheco and Paula Sambo
No one wants to invest in Brazil’s real. Or too few people, at least, for it to matter: The currency has fallen on an almost daily basis the past five weeks.
What’s perhaps most eye-catching about the decline is that it comes at a time when Brazil is lifting its benchmark interest rate to over 12 percent, a sharp contrast to the reductions and monetary stimulus being pursued by policy makers around the globe.
To yield-starved investors, those rates should scream buy. The fact that they aren’t underscores just how much sentiment has soured on an emerging global power that finds itself mired in stagflation and what could be its biggest-ever corruption scandal. Over the past month, the real is the worst-performing major currency in the carry-trade market, where investors borrow at low rates in one nation and invest in countries offering higher rates.
Even though “Brazil’s real yields remain very attractive for long-term investors, it’s been very difficult for carry strategies to do well,” Mike Moran, the head of macro research for the Americas at Standard Chartered Plc, said by telephone from New York. “And that is very much due to local issues that are very unique to Brazil.”
While Brazil’s new finance minister, Joaquin Levy, has begun to regain bond investors’ trust with his push to cut the budget deficit and maintain Brazil’s investment-grade credit ratings, the scope of the declines shows he has more work to do.
The real has dropped 8.1 percent in the past month, producing a carry-trade loss of 7.2 percent. Things are even worse over the past six months, with the currency down 25 percent, the most among the dollar’s major counterparts. It weakened 1.6 percent Wednesday to 2.9798 per dollar.
The plunge comes even as the central bank raises interest rates. Policy makers ratcheted up the benchmark to 12.25 percent in January and analysts surveyed by Bloomberg predict officials will boost borrowing costs by a half-percentage point to 12.75 percent Wednesday. That would be the highest level since 2009.
The increases make Brazil a glaring outlier. Eighteen of the 57 central banks monitored by Bloomberg have pared rates this year, with that number forecast to grow by month’s end. Just today, India and Poland reduced rates in surprise moves.
India’s reduction came days after the government agreed for the first time to give monetary officials a legal mandate to target inflation. Poland’s central bank cut borrowing costs to a record, in what economists described as a last attempt to nudge the economy away from a deflationary spiral.
As in many of the nations cutting rates, Brazil’s economy is weak. Gross domestic product is forecast to shrink 0.6 percent this year, according to analysts surveyed by the central bank. But with inflation quickening to 7.36 percent in the year through mid-February, the fastest pace in nearly a decade, Brazil has little choice but to keep raising rates.
As part of the government’s effort to quell the soaring cost of living and stave off a credit-rating downgrade, Levy has cut spending and boosted taxes. Swaps traders are now signaling those austerity measures will allow the central bank to begin lowering borrowing costs next year.
Still, that hint of optimism is largely absent when it comes to the real.
HSBC Holdings Plc, JPMorgan Chase & Co. and ABN Amro Bank NV all expect the currency to weaken beyond 3 per dollar, according to data compiled by Bloomberg. Net overseas holdings of futures contracts betting against the real jumped 48 percent this year to a record $38.1 billion.
“The real is going to struggle to make up much ground,” Christian Lawrence, a New York-based foreign-exchange strategist at Rabobank Markets, said in an e-mail. “It is harder to find positives than negatives in Brazil.”
Compounding Brazil’s woes are the allegations of kickbacks and bribes at state-controlled oil producer Petroleo Brasileiro SA. On Feb. 24, Moody’s Investors Service stripped the company of its investment-grade rating and warned of more downgrades.
With fallout from the scandal growing and the real sinking, Brazil may soon join Petrobras in junk territory, said Nicholas Spiro, managing director of London-based investment consultancy firm Spiro Sovereign Strategy.
“The risk of Brazil losing its investment-grade status -- already fairly high before the scandal escalated -- has increased markedly,” he said in an e-mail. A ratings cut “is more likely to happen sooner rather than later.”