Brazil's Mounting Woes Threaten to Wipe Out Bond Rebound in 2016

  • Country's was second-worst emerging-market performer in 2015
  • Economy is heading for the deepest recession since 1901

Brazil’s stint as the most lucrative emerging-market bond investment may be short-lived, according to Aberdeen Asset Management Plc and Commerzbank AG.

The country’s dollar-denominated notes returned 1.9 percent last week, the best performance among 60 developing nations tracked by Bloomberg. Still, the gains are just a reprieve from a rout last year that saddled bondholders with losses of 16 percent, the worst in emerging markets after Zambia.

And with Brazil beset by deepening economic and political crises, odds aren’t good the nation will be able to sustain its early outperformance. Latin America’s biggest economy is headed for its deepest recession since at least 1901 as impeachment proceedings against President Dilma Rousseff stymie desperately needed fiscal reforms and a global slowdown chokes off demand for the country’s commodity exports.

“Brazil sold off massively last year, so it is not surprising that in the absence of further bad news they can rebound,” said Viktor Szabo, who helps manage more than $11 billion of emerging-market debt for Aberdeen in London. “However, I wouldn’t read much into a one-week performance. Brazil will try to muddle through, so the question is whether markets will allow that. The fiscal outlook remains very grim.”

Gross domestic product will shrink 2.99 percent in 2016 after a 3.73 percent contraction last year, according to a central bank survey released Monday. The nation’s deteriorating finances helped trigger two rating downgrades to junk last year. 

Making matters worse, China, Brazil’s biggest trading partner, also is suffering an economic slowdown that’s fueling turmoil in its financial markets.

Rousseff’s ability to shore up Brazil’s economy in the face of this tumult is limited as she fights for her political survival. Congressional leaders, who are on recess until Feb. 2, are seeking to oust her for allegedly doctoring fiscal accounts and receiving campaign funds that stemmed from fraudulent activities. She denies any wrongdoing.

“January looks relatively good for Brazil, given politics is on holiday, but come February, noise is likely to revive with the likelihood of more downgrades and the clear exposure that Brazil has to China,” said Simon Quijano-Evans, a London-based emerging-market strategist at Commerzbank.

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