The Brazilian market is continuing to struggle amid concerns that political uncertainty and the li...
The Brazilian market is continuing to struggle amid concerns that political uncertainty and the likelihood of an Argentine-style government debt default are increasing.
The crisis in confidence has hit the Brazilian stock market, with the Brazilian Bovespa Stock Index slumping 17.19% in the period 23 May to 21 June in local currency terms. Over the period 25 June 2001 to 21 June 2002, the fall is even more marked with losses in local currency terms of 28.49%.
Analysts say that concerns over the sustainability of debt comes hand in hand with a lack of conviction in the economic policies of the candidates in the upcoming Brazilian presidential elections. Some local financial institutions have reported becoming uncomfortable holding domestic public debt when the new administration takes office in January 2003. Paulo Leme, analyst at Goldman Sachs says investors are worried about fiscal sustainability and the lack of specific economic policy proposals from the presidential candidates. Leme says: 'Part of the ongoing market turbulence reflects uncertainty about the ability of PSDB's candidate Jose Serra to win the election.'
Much of this uncertainty is misplaced, Leme says, even though Serra is trailing in the polls. 'In contrast to the deterioration in market sentiment, we believe that recent political developments are quite favourable to Serra because the basic political engineering to assemble the electoral platform and the polls are beginning to respond in favour of Serra.' However, Leme says it is critical for the government to keep markets confident about the daily macroeconomic management. In this context, he believes it is encouraging that on 13 June, the government announced six initiatives to restore confidence and stabilise financial market.'
Guido Barthels, global head of debt research at Dresdner Kleinwort Wasserstein, says the group sees Brazil as essentially a political call. He says if the electorate votes for political and policy continuity, sovereign risk premia can fall, reducing Brazil's intrinsic vulnerabilities to external and domestic stocks and lending time for reform.
He says: 'Our reading is that for residents, a vote for continuity could sharply reduce domestic refinancing risks with positive implications for external debts. Polls and now domestic debt problems have driven relative value relationships out of whack.
'Such mis-pricings may well resume or worsen with any new polls fears or domestic refinancing concerns, in the near term.' Barthels says that Dresdner is overweight in Brazil despite the haemorrhage of recent months because it retains courage in its convictions and prices are excessively low. However, he adds that the upside might be constrained by the rising debt ratios.
Leme says that Goldman Sachs believes that there are two possible routes to stabilise local financial markets. Either the opposition, fronted by PT's candidate Lula, comes out with an orthodox programme, or the gap between Lula and Serra, currently 18%, narrows significantly raising hopes Serra could go on to win a second round.
Leme says: 'We believe that over the next few weeks the Lula-Serra gap could narrow in such a way as to lead to a major re-pricing of Brazilian financial assets.'
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