News of a possible impeachment for Brazilian President Dilma Rousseff has been viewed as a potential catalyst for the country’s downtrodden equity markets and the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), but investors should temper expectations of significant near-term upside for the largest Brazil exchange traded fund.
Brazil’s gross domestic product declined a record 4.5% year-over-year in the third quarter, or on pace for its worst recession since the 1930s, reports Joe Leahy for the Financial Times.
Brazil’s economy shrunk 1.7% in the three months ended September against a revised second quarter, worse than analysts’ expectations.
“It’s been a record number of corporate credit downgrades for Brazil this year, but 2016 could see a 10:1 ratio of cuts to upgrades next year, says Fitch, especially if the sovereign itself is downgraded,” according to a Seeking Alpha brief. “The agency currently has a negative outlook on Brazil and on the grades of more than half of the Brazilian companies it rates. The current grade for Brazil is BBB-, the lowest investment-grade level. S&P has already downgraded the country to junk status.”
Multiple factors are dragging on the Brazilian economy. Unemployment rose to 7.9% in September from 4.7% in October last year. Inflation has jumped over 10% for the first time since 2002. The budget deficit has widened to 9.5% of GDP. Additionally, lower commodity prices, diminishing consumer credit boom and a corruption scandal at state-run oil giant Petroleo Brasileiro have all weighed on the economy. [Corruption Probe Plagues Brazil ETF]
Brazil’s real is in a wicked slump against against the dollar and resides at multi-year lows against the greenback. The real could face increasing pressure as global investors price in the rising odds of additional credit downgrades for Brazil. [Bad News for Brazil ETFs]