Country risk falls to its lowest level since 2020 after elections
CDS, country risk, retreats to 110 points after the first round; market bets on spending cuts. Read on Gazeta do Povo
TL;DR
- Brazil's country risk (CDS) has fallen to 110 points, the lowest since February 2020.
- This decline is attributed to the electoral outcome favoring Flávio Bolsonaro and a conservative Congress, signaling optimism for fiscal stabilization.
- The market anticipates liberal economic management from 2027 onwards, leading to a drop in risk and improved asset pricing.
- The formation of a conservative Congress, with significant representation from the PL party, is expected to facilitate the approval of structural reforms.
- Proposed fiscal reforms include replacing the current framework with a rigid debt-to-GDP limit, expense cuts, and ministry reductions.
- Lower country risk translates to reduced financing costs for the state and companies, boosting valuations and private credit.
- The sustainability of positive economic trends depends on addressing structural fiscal constraints, mandatory expenses, and political execution.
- External factors, such as US interest rates, require Brazil to maintain an attractive interest rate differential and a sound fiscal trajectory.