RIO DE JANEIRO, BRAZIL – The risk premiums on the yield curve will increase and the dollar will reach R$6, project Société Générale strategists, believing that the markets should expect further fiscal deterioration in Brazil.
According to the bank’s report released on Friday, January 15th, the exchange rate will suffer from slow economic growth, deterioration in fiscal and debt scenarios, and low-interest rates. News on vaccines is positive, but it may take time for the immunizer to be available to all in a context where Covid-19 cases in the country are on the rise.
“Moreover, (Jair) Bolsonaro lost political capital in the November municipal elections, and the low exposure before the February Congressional elections has hampered the scenario for reforms in the short-term,” the French bank said.
Société Générale recommended buying the dollar against the real on December 2nd when the currency stood at R$5.22. The goal is R$6.0, with a “stop” at R$4.90. The dollar was quoted at R$5,2712 on Friday.
On December 11th, the bank began to recommend an upward yield curve between the January 2027 and January 2022 maturities, with an entry point of 377 basis points, a target of 540 basis points, and a “stop” of 320 basis points. The spread stood at 380.50 basis points on Friday.
The bank noted that the long curve continued to be pressured by poor fiscal and debt prospects, while the short stretch continued to be tied to the Central Bank, which should keep the SELIC at a record low of 2% “at least” throughout the first half, “due to the wide negative gap and with supply issues affecting inflation coming to an end”.
“The Central Bank’s chance to raise interest rates in the short term is no more than zero,” Société said, saying that in the market, the bets are that the COPOM will begin to raise the SELIC in the first quarter, reaching the end of the year with a total increase of 350 basis points.
The French bank’s strategists understand that, with Brazil facing a second wave of Covid-19 and uncertainty about the availability of vaccines to the population and whether people want to be immunized, the risk of another “deep economic downturn and more stimuli than fewer” has increased, jeopardizing the spending cap.
“Consequently, investors should expect further deterioration of public accounts. Meanwhile, we expect the debt/GDP ratio to be around 100% in 2021,” said Société’s emerging markets strategy team, headed by Jason Daw.
Source: Reuters