How real is the real?
The Brazilian real stands tall atop the currency pile at present (the sovereign backed kind of currency anyway), at least according to Pam Woodall’s celebrated Big Mac index – a measure of how many delicious McDonald’s burgers you can buy with US$50. According to they, such script denoting the Efígie da República is overvalued to the tune of 61%. The country’s neighbours are on the podium also (Chile; Columbia for silver and bronze) but there is gulf between them, and the leader. The rising purchasing-parity of the real is also in lock-step with the surging Ibovespa index - ‘two-x’, as the parlance goes - closing north of 80,000 yesterday up from 40,000 in Jan of 2016; along with the real-denominated bond market which is similarly on the surge.
Brazil is pretty big; and it makes its presence known on the world stage: if you were noshing a Kung Pao Chicken in Shenzhen, you could just as easily be enjoying a bit of Brazilian bird (notwithstanding some import bans in recent years) and this is in a country – China – with 52 billion (yes, billion with a ‘b’) chickens. In addition to a significant exporter of commodities, Brazil is top five for land-mass; top five for population; a largish holder of foreign stocks and bonds; and – second only to China in its issuance of external US dollar debt.
At a glance you could infer that Brazil is tracking nicely – some sharp analysis from the team at Grant’s Interest Rate Observer notes the country’s recession era 2115 century bond (oversubscribed in 2015 and selling at 81 to yield 8.45%) traded at par in early Jan; 10-year USD sovereign debt trades on a spread of 192 basis points (the lowest since 2014) and the cost to insure against state default (through five-year default swap) costs only around 140 basis points (again, the lowest since 2014).
Real Brazil bulls may have a monkey or two in the wrench however: rumours of an imminent downgrade of Brazilian sovereign debt to ever deeper stratum of junk; the likelihood of ‘Car Wash’ Lula being elected (a man who has claimed to model himself on Donald Trump, which I think is an insult to Donald); the impending and very unpopular social-security reform act being passed; rising inflation; and years of underinvestment in infrastructure.
A sceptic might say it has all been a bit of lucky Macumba for Brazil, among other things: lowest-ever interest rates owing to low inflation, owing – in turn – to near record harvests. Don’t count your Big Mac’s before they’re in the bag though.
(I’m pretty sure that’s how that saying goes).
