Emerging markets bond ETFs with exposure to Brazilian sovereign debt could be pinched in the near-term after ratings agency Moody’s Investors Service sounded a less-than-optimistic view on the outlook for the country’s bonds.
On Wednesday night, Moody’s pared its outlook on Brazilian sovereign bonds to stable from positive while affirming the credit rating of Latin America’s largest economy at Baa2. That is an investment-grade rating. Among the BRIC nations, India is viewed as more vulnerable than Brazil to a possible sovereign ratings downgrade, but there has recently been speculation Brazil could suffer that fate. [Are India ETFs Becoming the New Brazil ETFs?]
The Brazilian government has previously not been shy about spending its way out of economic slumbers, but the country’s deteriorating finances have plagued ETFs such as the iShares MSCI Capped Brazil ETF (NYSEArca: EWZ) this year. In June, Standard & Poor’s put a negative reating on Brazilian debt. [Brazil ETFs Worst Global Performers in Q2]
“Moreover, the outlook for economic growth remains weak. After having recorded relatively low rates of growth for the past two years, the expectation is of continuing weakness with near-term GDP growth expected to barely exceed 2% for 2013 and 2014, leading the Brazilian economy to report below-trend growth for a total of four consecutive years.