Perceived Risk of Brazil’s Economy Hits Five Year Low Ahead of Pension Overhaul Vote

(Bloomberg) -- The perceived risk of Latin America’s largest economy has dropped to a five-year low as President Jair Bolsonaro’s proposed overhaul of the country’s pension system nears a key vote in Congress.

The cost to insure Brazil’s debt against default for five years narrowed to as low as 138 basis points over comparable U.S. Treasuries Tuesday morning, the tightest since September 2014, three months before the onset of a crushing two-year recession in the country. Its spread over credit-default swaps in Mexico, the region’s second-largest economy, is the least in more than six years.

There’s greater global market appetite for riskier emerging-market assets as the U.S. Federal Reserve considers whether to reduce its key interest rate. Domestic developments are also boosting Brazil’s appeal, including passage of a trade deal between the Mercosur trade bloc and the European Union. More importantly, the long-awaited pension reform proposal that would ensure sustainability of public finances may face its first vote on the floor of the lower house Tuesday.

To read more: Brazil Pension Bill May Face First Vote on Lower House Floor

“The combination of global interest rates going lower and the real possibility that the reform gets approved is contributing to this flow towards Brazilian securities in general,” said Marco Aurelio de Sa, head of investments in the Americas for CA Indosuez Wealth Management. It’s possible credit-default swaps “trade even tighter in the second semester as the reform gets approved.”

Rosier sovereign outlooks from credit ratings firms would help drive down Brazil’s country risk, De Sa added. Brazil credit-default swaps may even match those of Mexico by year-end, according to Luiz Eduardo Portella, a founding partner at asset manager Novus Capital. That would mark their first convergence since 2011.

As Brazil’s credit-default swaps fell Tuesday, Mexico’s rose on the surprise resignation of the nation’s finance minister. The gap between them is less than 25 basis points.

To read more: Mexican Finance Chief Abruptly Resigns, Sending Peso Tumbling

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