Brazil poses a larger threat of contagion for global financial markets than other emerging economies


By Walter Brandimarte, RIO DE JANEIRO (Reuters) – Brazil poses a larger threat of contagion for global financial markets than other emerging economies, far eclipsing Russia and China, Fitch Ratings said on Wednesday, giving highlights of an upcoming survey of European fixed-income investors

(L-R) Chinese President Xi Jinping, South African President Jacob Zuma, Brazil's President Dilma Rousseff, Russian President Vladimir Putin and Indian Prime Minister Narendra Modi attend a working breakfast during the BRICS Summit in Ufa, Russia, July 9, 2015.  REUTERS/BRICS/SCO Photohost/RIA Novosti
(L-R) Chinese President Xi Jinping, South African President Jacob Zuma, Brazil’s President Dilma Rousseff, Russian President Vladimir Putin and Indian Prime Minister Narendra Modi attend a working breakfast during the BRICS Summit in Ufa, Russia, July 9, 2015. REUTERS/BRICS/SCO Photohost/RIA Novosti

The investors, who manage an estimated 7.8 trillion euros in assets, considered economic imbalances, political challenges and  U.S. interest rates to select the two biggest contagion threats from a list of five major emerging market countries that also included Turkey and India.

Seventy-six percent of the respondents selected Brazil, while 38 percent picked Russia and 36 percent chose China. Turkey and India were chosen by 30 percent and 7 percent of investors, respectively.

Although the investors did not elaborate on the reasons for their choices, Fitch analysts Shelly Shetty and Monica Insoll noted that foreigners are heavily invested in Brazil’s debt at a moment when the country faces severe economic headwinds.

An expected recession, coupled with rising inflation and budget deficits, is making it tough for President Dilma Rousseff to meet her fiscal savings goals, putting at risk Brazil’s coveted investment-grade sovereign rating.

A growing political crisis related to a corruption scandal at state-run oil firm Petroleo Brasileiro SA < PETR4.SA also has weakened Rousseff and raised questions about her ability to pass austerity measures in Congress

Brazilian companies are further constrained by their strong reliance on dollar-denominated debt at a moment when interest rates are rising at home and abroad, the analysts said

Besides that, investors have recently increased their exposure to Brazilian corporate debt, which explains their growing unease about the future of Latin America’s largest economy.

“The number of inquiries that we have from all types of investors about Fitch’s opinion on Brazilian and Latin American risk has absolutely rocketed,” Insoll said in a phone interview.

“Brazil has been very popular as an emerging market, so investors are being very careful about trying to quantify their risk.”

The Fitch survey will be released later this month.

(Reporting by Walter Brandimarte; Editing by Paul Simao)

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