Brazil seen weathering Russia storm--US investors
Reuters, Monday, August 17, 1998 at 15:09
By Apu Sikri
NEW YORK, Aug 17 (Reuters) - Some superficial similarities
between the macro-economic situation of Russia and Brazil have
prompted some investors to dump Brazil's outstanding bonds but
most market participants said such comparisons are unwarranted.
Brazil supports a large short-maturity domestic debt at
relatively high interest rates, like Russia. Brazil also has
relatively big fiscal and current account deficits by Latin
American standards, and a managed currency, analysts said.
"Brazil will be singled out because of its current account
deficit and a slightly overvalued currency," said William
Nemerever, portfolio manager at Grantham Mayo Van Otterloo &
Co., a money management firm in Boston.
Amid a general emerging markets slide, Brazil's global
bonds due 2027 were bid at 76 Monday after trading as low as
74-1/2 last week. The last time Brazil's external debt traded
this low was in late October last year in the middle of a
tumble across Asian markets.
But many investors, analysts and traders contend the
difference between the fundamentals of Brazil and Russia is
like night and day. For one, "Brazil has huge reserves if ever
money leaves the country," said Paul Masco, head emerging
markets debt trader at Salomon Smith Barney Inc.
External reserves are estimated at about $72 billion,
according to Banco Santander.
"We don't believe Brazil is going to be put in the same
position" as Russia, said Nemerever. "Brazil has a strong,
functioning economy, much better-developed capital markets," he
said.
Part of the reason of the slide in Brazil's bonds has been
technical, according to traders. Many investors with long
positions in Russian debt have taken short positions in
Brazil's "C" bonds and global bonds as a sort of rough hedge.
Brazil's Finance Minister Pedro Malan alluded to technical
pressures on the country's external debt in comments made
Monday. "Those who need liquidity will sell off their Brazilian
debt because ours are the most liquid securities," he said.
To be sure, compared to its neighbors, Brazil's domestic
debt, at around 33 percent of Gross Domestic Product (GDP), is
high. Moreover, the current six-month rate on short-term debt
is roughly around 21 percent, according to analysts.
Brazil's fiscal deficit, at around 6.5 percent of GDP,
compares to about 1-1/2 percent for Mexico and 2 percent for
Argentina, Latin America's other major economies, said Luis
Luis, director of emerging markets bond research at Scudder
Kemper Investments. More importantly, external debt is a
whopping 286 percent of annual exports, he said. That could be
a source of pressure on the currency.
"Brazil's currency may be slightly overvalued, but it has
no banking crisis which is what triggered the crisis in
Russia," said Luis. Moreover, Brazil's banks are very highly
capitalized and its domestic debt is held primarily by local
investors, he said.
Given the improving fundamentals, "rates are much lower in
Brazil than the beginning of the year" and "could be reduced
further," said Dany Rappaport, economist at Santander Brazil.
Copyright 1998, Reuters News Service |
