Brazil and Mexico follow divergent long-term risk trends

By:
Jeremy Weltman
Published on:

Investors should take note: LatAm’s big two have been offering contrasting portfolio options for some time. This year is no exception.

Economists and other experts taking part in Euromoney’s Country Risk Survey have cast doubt on Brazil as an investment destination in recent years.

Besides Argentina and Venezuela, the two prominent defaulters, Latin America’s largest country has seen its risk score decline more than any other, to 58.5 out of a possible 100 points (a lower score represents increased risk).

Brazil’s risk score started to fall a long time before its economy slipped into recession this year. Experts lost faith in a growth-model driven by domestic demand with private consumption and investment weakening, and fiscal pressures exacerbated by World Cup-related public spending at a time when the commodity cycle has turned less favourable.

During the past three years, all but two of Brazil’s 15 survey indicators for political, economic and structural risk have deteriorated. An inflexible labour market, poor infrastructure, complicated tax system and stifling regulations explain the falling score for Brazil’s regulatory and policymaking environment – the one economic indicator sliding faster than any other this past year.

Investment destination

Mexico, by contrast, has continued to find favour among risk experts in recent years, and the country’s image as an investment destination is much improved, particularly since its risk rating surpassed Brazil’s last year.

Further reading

Brazil: special focus

On a score of 62 points and lying 37th on Euromoney’s global risk rankings, the sovereign is closing in on tier-two status, pointing to a future upgrade of its triple-B credit rating.

At the heart of Mexico’s improving risk profile is a more stable and consensus-seeking political approach, encouraging risk experts to raise their scores for government stability, and the regulatory and policymaking environment under the presidency of Enrique Peña Nieto, working congenially with opposition parties to pass legislation since 2012.

All five of Mexico’s economic risk indicators have enjoyed a rising score trend on the back of its expanding middle class driving a consumer boom, as well as overdue improvements in educational standards and structural reforms boosting cost efficiencies.

Removing entry barriers to private investment in the oil, gas, electricity and telecoms sectors has bolstered Mexico’s global competitiveness, alongside the benefits of its highly productive maquiladora manufacturing base – enjoying duty-free access to a US market – registering solid economic growth. 

This article was originally published by ECR. To find out more, register for a free trial at  Euromoney Country Risk.