Brazil’s risk premium tops 200 points, reaches highest since May 2023 | Markets
Brazil’s risk, measured by the five-year Credit Default Swap (CDS) spread, broke through the symbolic 200-point threshold this week, reaching its highest level since May 2023. According to S&P Global data, the surge reflected a sharp deterioration in domestic risk perceptions, with Brazil’s five-year CDS hitting 200 points on Monday (23) after peaking at 219 points last Thursday.
In a recent development, Brazil has stood out negatively among major emerging markets. Since the beginning of December, Brazil’s five-year CDS jumped by 21.9%, a spike far outpacing other markets such as Mexico (+5.4%), Colombia (+4.4%), South Africa (+3.8%), and Turkey (+2.1%).
“The CDS was quite stable, but it started to ‘move’ now, given the persistent deterioration in risk perception we’ve been observing,” said Marco Antonio Caruso, an economist at Santander.
To combat heightened fiscal risk, markets have priced in a much tighter monetary stance, pushing the ex-ante real interest rate toward 10%—its highest level since October 2008. According to Valor Data, using the 360-day interest-rate swap and one-year inflation expectations from Central Bank’s Focus survey, this real interest rate climbed to 10.2% before closing last week at 9.52%.
“In the current environment of unanchored expectations, with the exchange rate pressuring tradable prices, even the more inertial prices will feel the heat,” Mr. Caruso noted. “Combining this with the Central Bank’s signal, we projected a peak of 15.5% in interest rates.” Santander forecast two 100 basis-point Selic hikes in January and March, followed by a 75-bp hike and then another 50-bp step.
“I don’t believe the macro conditions to stop raising interest rates will be in place anytime soon. I’m not sure if the Focus survey will improve, but the trigger for a pause could be the perceived temperature that economic activity will worsen significantly,” Mr. Caruso said. Santander expects GDP to grow 1.8% next year, factoring in a strong slowdown in the second half.
Santander also projected that tightening financial conditions—evidenced by notably high real interest rates—would add to the fiscal drag expected next year, alongside a likely drop in credit impulse. “Credit is still going strong, and families have not deleveraged yet, which could raise concerns,” Mr. Caruso said. “A change in the CMN [National Monetary Council] resolution might significantly alter the credit impulse, as stricter debt-provision rules for banks are set to take effect.”
Meanwhile, Barclays’s chief economist for Brazil, Roberto Secemski, believes that although the market sentiment “spiral” is still unfolding, it “could be interrupted by the approval of congressional bills last week, combined with the Central Bank’s heavy foreign-exchange intervention and remarks from future central banker Gabriel Galípolo, who indicated a high bar for altering the COPOM’s guidance of two more 100-bp hikes.”
Still, Mr. Secemski warned that a persistently weaker Brazilian real, amid ongoing fiscal questions, “was likely to push inflation higher in the coming months and quarters.” Barclays raised its end-of-cycle Selic estimate from 14.25% to 15.25%, anticipating that any monetary easing would begin only in 2026.
Mr. Secemski also pointed out that a major turnaround in market sentiment “would depend on credible new fiscal measures to cut total spending levels and genuinely restore the primary surplus.” He added that while further government action was “unlikely” in the near term, a recent video released by President Lula—pledging to monitor the need for new fiscal measures—was a sign that officials remained alert to mounting fiscal risks.
