Brazilian dependency on external capital decreasing: higher odds of virtuous cycle
Two charts below:
One with brazilian Current Account + Foreign Direct Investment, rolling 12 month sums over GDP for same period.
The other is an apples-to-bananas attempt at real rates differential between the USD and the BRL: it’s apples-to-bananas because it uses spot nominal rates (future) minus YoY realized CPI (past). I understand that, know of its inconsistency, but I choose to try being roughly right than precisely wrong considering how hard (useless?) forecasting is.
First chart shows how low brazilian demand for external funding has been in the recent past. Close to 2-decade highs in [Curr Acc + FDI] / GDP.
Second chart shows that real rate differentials are also near 20-year lows, meaning that domestic companies or even Federeal Government have little incentive to reach offshore for funding and that, longer-term, means much lower currency exposure, thus higher odds of the killing of the circular reference that typically strikes countries without domestic savings.
Longer-term the diminished demand for external funding, helped by close-to-lowest cost advantage of issuing USD liabilities versus BRL liabilities, drives down the risk of large devaluations, helping lower inflationary expectations, lower real yields, triggering a virtuous cycle.
If real growth materializes domestically and currency inflows follow we could see a swift shift into a higher BRL, even lower inflationary expectations, lower long-term real yields and much higher equity prices.