Already fragile
Donald Trump may not be good news for Brazil. The country is just beginning to see signs of political stability after the impeachment and ouster of Dilma Rousseff.
The reaction of the country’s equity markets and ETFs tell the mood in the country. The Brazilian stock market has seen an excellent run in the wake of anticipated and actual change at the helm of the government. Hopes of a better future after witnessing recession for several quarters has also helped stocks rise.
However, after the election of Donald Trump, the iShares MSCI Brazil Capped ETF (EWZ) slipped. It fell 3.3% on November 9 and followed that up with a nosedive by 7.9% the next day.
For a country that hopes to erase the recessionary trend in 2017, a hardliner is not good news, especially when President Michel Temer is expected to tighten the government’s purse strings in order to improve government finances.
Trade is another issue
Going by Trump’s views on trade deals, Brazil may be threatened on the exports front. Though China is the largest export destination for Brazilian goods, the US remains in the top three, and restrictions on Brazilian exports (BRFS) (FBR) in the form of duties or tax levies would further hurt the already broken Brazilian economy.
This is true for Latin America (ILF) in general and Mexico in particular. Trump has taken a tough stance on NAFTA (North American Free Trade Agreement), which would impact trade with Canada and Mexico. Mexican equities have been hit harder than Brazilian ones with the iShares MSCI Mexico Capped ETF (EWW) falling 8.5% on both November 9 and 10. The Mexican peso has tanked as well. However, the iShares MSCI Canada ETF (EWC) has not been hurt too much. It actually posted a small rise on November 9.
A Trump victory and the anti-NAFTA stance that comes with it would bode very poorly for Mexico in particular given that exports heading north of the border account for over 25% of total GDP. Furthermore, domestic demand has found support from remittances which have risen to record highs and been more important than oil revenues over the past two years. Any risk to free trade with, and remittances from, the US will have a significant impact on Mexican activity and USD/MXN would likely find a new home in the 20s. Another point significant to Mexico is the potential for a Trump victory to trigger a more anti-US and populist stance amongst Mexican voters.
In a scenario of a Trump victory, the Brazilian economy would be affected through higher risk aversion and worse financial conditions (at a global scale). Those would cause Brazilian asset prices (such as the BRL) to depreciate, despite the decline in US interest rates. A weaker BRL could slow down the ongoing speed of disinflation a bit, and pose some risk as per the pace of BCB rate cuts projected for 2017. The recovery in activity expected for next year would be mildly affected as well, via the impact of slower global growth on Brazilian exports.
Since the Brazilian economy is relatively closed (e.g. exports account for about 11% of GDP), the bigger impact would however stem from the financial channel (as Brazil’s low level of domestic savings make the economy dependent on foreign funding). Yet the sound current account deficit numbers of late and the hefty levels of FX reserves imply no risk for the balance of payments. While a “Trump” shock would probably be greater for Brazil as compared to a potential “Brexit” shock (since Brazilian exports to U.S. account for 12-13% of total, whereas exports to UK account for around only 1-2%), such a development would probably not derail the implementation of fiscal reforms, which is by far the most factor for the Brazilian economy now.”
FROM: Market Realist
FROM: FX STREET
Published by Wes
No comments:
Post a Comment