High Real Interest Rates in Brazil – Is it worth the risk?

No news, Brazil pays the highest real interest rates compared to the 40 most traded government bonds in the World.

The rare combination of monetary tightening and persistent inflation assures the Brazil position for many years, only lost on a brief moment for Turkey in 2007 and China in 2009.

No news that the BRICs (Brazil, Russia, India and China) occupy the first four positions in the ranking, considering similar interest rates and inflation forecasts (except for China, which a lower inflation forecast leads to a higher real rate).

But is it safe to put the money in Brazil? Many will say that the rule changes and the regulatory risks are not worth the gain. Others will say that a probable new government will turn Brazil into a safer place for foreign investors.

Ok, there is no way to predict the election results, neither if the current government will manage to stay, nor if it will change the rules for fixed income investments in case of a second term of Dilma Roussef.

But there are some aspects that explain why 700 mi USD left Brazil this year and the why confidence is not that high. As once said by James Carville, "It's the economy, stupid".

The country had more than one chance to make the necessary and important changes to reduce, or even eliminate the well known “Brazil Cost”, which includes a monstrous and bureaucratic tax system, massive government, high labor costs, lack of investments in infrastructure, low investment rate and prices indexation. Productivity down the drain.

These issues should have been addressed since Fernando Henrique’s mandate, but it went through since then and no president was brave enough to face the problem and afford the political burden, and gains, of the changes.

Bearing that in mind, we know that inflation in Brazil is and will be a reality for many years until these changes are made, and real interest rates will continue to gain attention.

However investors rarely put all the eggs in one basket, ie, they cannot rely only on the fixed income and since the economy has several bad signs, investments such as private equity, stocks, foreign exchange and several others suffer a lack of attractiveness. Again, "It's the economy, stupid".

In a scenario of global economic growth and high demand for commodities, as in 2007, these problems could be swept under the carpet, but it is no longer possible. The new government, whatever it is, has the difficult task of put in practice the necessary changes to improve the Brazilian productivity as a whole, or else, not even massive currency devaluation, tax relief and protectionism will no longer help the local economy. 

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Jason Vieira é o Editor-Chefe e Diretor Geral da MoneYou e executivo sênior da X-Infinity Invest. Com mais de 20 anos de mercado, já ocupou cargos de estrategista, CIO, economista-chefe e analista internacional em instituições como Apregoa.com, UpTrend Advisors, GRC Visão, KGP, CM Capital Markets, Sanwa Bank, CLSA, JP Morgan, Santander, entre outras. Economista formado pela Universidade Mackenzie, possui diversas extensões de mercado financeiro e economia, com forte foco internacional.

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