As emerging market currency and asset markets have come under greater pressure in the second half of 2013 – amid lower growth and less accommodative US monetary policy – some commentators make Brazil odds-on to become the first of the Bric nations to lose its investment-grade rating.
While the economic outlook in Brazil is less favourable than it was 18 months ago, Euromoney’s Country Risk Survey indicates the country – ranked 39th globally and still included in ECR tier three – is still considered to be less risky than India and Russia, ranking 59th and 60th respectively. Under ECR’s methodology, any country included in ECR tier three is considered to be investment grade.
Brazil is the only Bric to have slipped in the rankings during the third quarter, enabling China (climbing to 37th) to become the safest of the four once again. However, Brazil’s CDS spreads (at 187 basis points on November 5) are tighter than those for the State Bank of India – an equivalent proxy, at 297 basis points – according to Markit, the financial information services company, and a careful inspection of risk indicators suggests Brazil still has many supporting features.
Note, from the chart below, it comes out on top for nine of its 11 economic and political risk indicators.
One negative indicator is the economic-GNP outlook, which is worse than India’s, but this reflects a stronger growth prediction for India next year (5.1% compared with 2.5% for Brazil, according to the IMF); where the current account is concerned, India’s deficit is expected to be larger.
The other is government finances, vis-à-vis Russia – backed by its oil and gas wealth – but not India.
Moreover, Brazil’s political risk indicators are highly favourable relative to Russia’s, and also stand out in comparison with India’s, especially where government stability is concerned.
Brazil might be downgraded, and it might become the first Bric to lose its investment grade, but Euromoney’s Country Risk Survey indicates such a move is not justified.
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