By Alfred Rinaldi, Contributing Reporter RIO DE JANEIRO, BRAZIL – A sharp rise in the cost of Credit Default Swaps (CDS), which is an indicator of a country’s risk premium, is increasing pressure on the Rousseff government to address market worries about the country’s economic standing. Last week, the cost of CDS stood at 210.9 base points, representing a steep monthly rise of 34 percent compared to the end of the year, when CDS stood at 157. Brazil’s President, Dilma Rousseff needed to reassure financial markets at the Davos World Economic Forum, photo by Robert Filho Stuckert/PR. While this is still a long way below the 400-point peak during the financial crisis in 2008, it is still significantly more than investors had to pay in the sunny days of May 2007, when the premium for insuring against credit defaults stood at only 67 points. Both external and internal factors are contributing to the perception of risk vis-a-vis Brazil. On the one hand, the U.S. Federal Reserve’s tapering of quantitative easing (QE) is leading to a redirection of capital flows away from emerging markets into dollar-denominated assets. From China to Mexico, Turkey, India and South Africa, the entire segment is feeling the effects. However, even within this group, Brazil is not a strong performer. For Mexico, the cost of CDS is currently half that of Brazil’s, at 111.5 base points. Chile is doing better still at only 82.3. Observers in the financial sector are pointing to this data as an indicator that many of Brazil’s problems are home-made. When calculating the cost of CDS, investors take into account economic growth, inflation and the government’s fiscal standing – all of which have recently worsened in Brazil. Speaking to O Globo, the chief economist of Banco Votorantim, Roberto Padovani, said, “In Brazil, we’ve seen economic growth losing momentum, which makes the country less attractive. This is further aggravated by problems such as the lack of fiscal transparency.” Alexandre Tombini, President of Brazil’s Banco Central, has been raising interest rates to defend the currency, photo by Valter Campanato/ABr. Another indicator of Brazil’s worsening economic standing are capital outflows. In 2013, they amounted US$12.26 billion. A determined intervention by the government has resulted in a reversal of the trend, with a positive balance of capital flows of US$1 billion this January. The government also points to its foreign reserves, which currently stand at US$376 billion. “This should put investors’ minds at rest”, a government economist told O Globo. Yet for observers such as Sidnei Nehme of currency broker NGO, the month’s surplus is just a blip. “The outlook is still unfavorable. Even with the current inflow of dollars and the Banco Central’s efforts to acquire dollars, the Brazilian real continues to lose value,” Nehme explains. The real has fallen by 21 percent against the dollar over the last twelve months. Commentators such as John Jardine, Supervisory Analyst at brokerage and investment house Raymond James Latin America, are more bearish still. Speaking to The Rio Times, Jardine said, “The government is trying all it can to attract foreign investment, with interest rates heading for 11 percent at an inflation rate of six percent. But this won’t work. “The Brazilian real has further to fall and may well close the year at R$2.70 to R$3.00 to the US dollar. What we don’t see yet is a determined attempt to address the country’s structural problems, such as its high level of taxation, which is fed by the government’s elevated public spending,” said Jardine. Caught between the demands of international capital and a restive electorate, which is due to go to the polls later this year, the Rousseff government is facing a difficult test. One Response to "Brazil’s Risk Premium Rises Sharply" Pingback: Headlines of the day II: EconoGrecoSinoFuku | eats shoots 'n leaves Leave a Reply Cancel Reply Your email address will not be published.