Greece has been the center of attention recently, but according to a survey conducted by Fitch Ratings, European investors believe that a country on the other side of the world could, more than any other emerging market nation, prove to be the greatest source of contagion in the second half of the year.
Brazil, the seventh-largest economy in the world, hasn’t been an investor favorite for quite a while now. High inflation has led to higher interest rates and increased borrowing expenses for many Brazilian companies. Many of them are overleveraged and defaults have increased, and the sharp decline in global commodity prices – oil, soybeans and iron ore – has also taken its toll on the Brazilian economy.
But the greatest concern for Brazil is what many investors believe to be a lack of political will to enact the reforms necessary to strengthen the economy and increase its attractiveness to investors. In the second half of this year, when ongoing macroeconomic issues are expected to impact most emerging economies, policy strength is going to be key.
Where does Brazil stand?
Verena Wachnitz, portfolio manager of the T. Rowe Price Latin America Fund
“Brazil is a large, liquid market with many well-run companies,” according to Wachnitz, and “it has a generally good demographic profile, a strong judiciary, and an entrepreneurial spirit.”
The problem has been the very poor macro environment that has characterized Brazil over the past years. The kind of tough reforms that needed to be implemented in order to get the country’s fiscal and capital accounts in better balance were not put in place, Wachnitz said and interest rates had to be increased to combat rising inflation and support the currency.