Latin America: Market round-up
Brazil: keep your eye on the ball
Christian Stracke, emerging-markets analyst at CreditSights in New York, doesn't agree with the increasingly-held view that Brazil could make investment grade.
In his research note, entitled Brazil – pre-history of a currency crisis, Stracke notes that the Brazilian real is stronger now than it has been in more than 10 years, and that emerging-market currencies never, over the medium to long term, sustain such levels of overvaluation.
Stracke points out that in the harsh crisis of 2002 the Brazilian real fell 27% in trade-weighted, PPI-adjusted terms. If it dropped back to October 2002 levels today, it would have to fall twice as much: 54%. He notes drily: "We do not need to remind anyone who lived through the 2002 crisis that Brazil 40s were trading at 43 (versus 115 today) during that 27% real depreciation of the exchange rate."
Meanwhile, the government has $141 billion in external and dollar-linked debt, against $60 billion in reserves; it has to pay almost $30 billion this year alone in external debt service to private and multilateral creditors.
The crisis of 2002 took place amid the political noise of a general election, and another is coming up in 2006.