EM Monthly: The Brazil Paradox: Politics versus potential

April 9, 2025

If you have any feedback on this article or are interested in subscribing to our content, please contact us at opinions@muzinich.com or fill out the form on the right hand side of this page.

--------

Despite a challenging political backdrop, a supportive central bank and relatively solid sovereign metrics mean Brazil offers compelling opportunities in corporate credit, argue Warren Hyland and Marcos Räisänen

Brazil is a nation of vast potential and complexity. As the world's fifth-largest country by land area and seventh largest by population, it boasts rich natural resources, biodiversity and an economy spanning a range of industries.¹  However, political instability, corruption and fiscal mis-mismanagement have impacted investor confidence.

Despite these challenges, we view Brazil as an attractive source of opportunities, particularly in corporate credit markets. As the country navigates economic uncertainties and prepares for the 2026 elections, its ability to implement effective reforms will determine its long-term trajectory.

Attempts at fiscal reform

Brazil has a long and complicated political history. Its return to democracy in 1988, clear separation of powers and expansion of social and welfare programmes have contributed strongly to national development. Yet frequent constitutional amendments, combined with ongoing political corruption have left investors sceptical about Brazil's institutional values and fiscal responsibility.

In 2023, despite President Luiz Inácio Lula da Silva’s attempt to balance fiscal prudence with social investment needs, government credibility continued to deteriorate, and public debt rose. While the government performed better in 2024, with the administration delivering significant spending cuts and narrowing the deficit, limited efforts to reduce expenditure resulted in a continued deterioration in public debt (Figure 1).²

This amplified the significance of the 2025 budget, released in November 2024, where Finance Minister Fernando Haddad needed to come up with a convincing fiscal package to improve the government’s fiscal creditability and stabilize the country’s deteriorating public finances. The administration unveiled a relatively limited BRL70 billion (US$11.8 billion) of spending cuts, in line with expectations, instead relying heavily on boosting revenues by closing tax loopholes and enforcing tax rules.

Overall, this was not the comprehensive structural reform needed to curb the persistent growth of public debt and investors lost patience. The real and benchmark equity index (Ibovespa) fell over 8%, pushing the currency to its weakest ever level against the US dollar while sovereign credit default swap spreads widened 42%, increasing the likelihood of a downgrade (Figure 2).

Central bank steps in

For the Banco Central do Brasil (BCB), expansionary policies also contributed to rising inflation and a widening current account deficit. This was exacerbated by currency depreciation and rising capital outflows. In response, the BCB assumed the role of buyer of last resort and in December 2024 carried out its largest monthly intervention since adopting a floating exchange rate in 1999, selling US$21.57 billion in the spot market to offset a record US$26.41 billion of capital outflows. 

Simultaneously, it accelerated monetary tightening and raised policy rates 100 basis points (bps). This brought the benchmark Selic rate to 14.25%, pushing interest rates to 8.6% — well above the 5% BCB’s neutral level.²

Sovereign solidity

Entering 2025, price action suggested the BCB had achieved its objective of restoring stability to capital markets and the currency has recovered to pre-budget levels. Equities have also recovered, and inflation expectations appear anchored. However, the cost of stability is steep. Policy rates are at multi-decade highs, and consensus growth forecasts for 2025 have been lowered to 2%, with further downward revisions likely. This comes after output reached 3.4% in 2024.

From a sovereign perspective, however, Brazil may have been unfairly punished by recent market price moves. The country holds Ba1/BB/BB credit ratings from the three major rating agencies, with the most recent adjustments being upgrades.

Brazil’s economy remains relatively closed to trade,² partially insulating it from the impact of a full-scale global tariff war given its economy is not as reliant on exports. On the flip side, Brazil could potentially benefit from geopolitical shifts. If the US were to impose tariffs on crude and refined oil, the country’s energy exports could see increased demand.

Ongoing US-China tensions could provide further opportunities, as China, Brazil’s largest trading partner, may look to deepen economic ties with the country.

From a debt management perspective, Brazil is expected to maintain a near-primary balanced budget in response to market concerns, meaning government revenue will closely match expenditure. This level of fiscal discipline is notable compared to global peers. While public debt levels have risen, which remains a market concern if left unchecked, the current debt-to-GDP ratio of 76.95% at the end of 2024 is manageable. Debt is projected to peak at 83% over the next decade, a level in-line with international norms.³ 

The composition of Brazil’s sovereign debt provides further insight. External debt accounts for only 14.6% of total obligations, and the country’s international reserves more than cover this amount. This effectively makes Brazil’s external debt cash-covered, positioning it as an attractive investment even during periods of volatility. The country relies predominantly on domestic funding, with local debt representing 62.3% of total borrowing at the end of 2024. This funding structure allows the BCB to maintain its independence, as the sovereign is not reliant on international financing.

However, the price of self-sufficiency is high. With policy rates set at 14.25%, interest payments alone account for approximately 8% of GDP, the equivalent of the country’s entire fiscal deficit. Bond vigilantes have sent a clear signal, reinforcing the need for the government to adopt a disciplined fiscal approach.

Current economic projections indicate policy rates will peak at 15% by mid-2025 before normalizing in late 2025/early 2026. The speed of this normalization will depend on the pace of the economic slowdown, stability of inflation expectations, and extent of the Brazilian real appreciation. Every 100bps of monetary easing is estimated to reduce fiscal interest costs by approximately 0.5% of GDP.

Over the long term, Brazil’s debt burden is expected to stabilize and eventually decline, but this will require the government to achieve a primary surplus in the range of 2-3% of GDP.² How to reach this target will be a defining issue in the 2026 election, shaping the fiscal policy debate and broader economic strategy.

Opportunities in corporates

Brazilian company balance sheets are generally strong. Average net leverage stands at 1.5x, with interest payments 5x covered and cash reserves covering short-term maturities by 2.2x. Additionally, companies maintain healthy gross margins of 27.1%, reflecting strong profitability.

As credit managers, leverage is a key risk metric. Credit investors require adequate compensation per unit of leverage—the higher a company’s leverage, the greater our demand for yield. Brazilian corporate credit scores well under this valuation framework, with investors receiving 100bps per turn of leverage in investment grade bonds and 194bps in high yield. This compares favourably to US companies, where compensation stands at 32bps and 68bps, respectively.⁴

Figure 3: EM corporate credit metrics

Source: JP Morgan, as of March 2025. EM corporate credit chartbook. For illustrative purposes only.

We believe Brazilian corporates offer diverse investment opportunities across multiple sectors. For agribusiness, where Brazil is a global leader in grains, sugar and soybean production, we believe the most attractive opportunities lie in logistics infrastructure such as railways, highways and river transport to enhance export efficiency.

With Brazil the world’s largest exporter of beef and poultry, the protein sector benefits from cost advantages and a weak currency. Similarly, mining and pulp industries look well positioned to take advantage of the weak real and should be supported by the exit of higher-cost competitors.

The car rental sector presents compelling opportunities, in our view, particularly due to global car tariffs. Over the past decade, the sector has achieved compound annual revenue growth of 15%, driven by the expansion of ride-hailing services, increased penetration of rental cars in leisure and tourism and a growing preference for corporate fleet outsourcing.² Equipment rental also offers a strong investment case, with consolidation opportunities fuelled by the expansion of construction, agribusiness and mining.

Healthcare’s long-term growth potential is underpinned by Brazil’s aging demographics and low private health insurance penetration, which currently covers just 24% of the population.² The banking sector continues to deliver strong profitability; however, caution is warranted as high Selic rates could lead to slower loan growth and higher delinquencies.

Finally, Brazil has abundant reserves in oil and gas alongside cutting-edge offshore technology. We are constructive on the fuel distribution segment that has benefitted from economic activity and increasing vehicle ownership.

Carefully constructive

Brazil stands at a crossroads, balancing economic potential with structural challenges. While political and fiscal uncertainties remain, the country’s wealth natural resources, resilient industries and proactive central bank could offer a foundation for future growth. Investors must carefully assess risks, but on a selective basis we see compelling opportunities in Brazil’s corporate market.

EM look back – March

Fixed income

• EM corporate credit outperformed EM sovereigns.
• EM corporate credit was one of the few indices to post a positive total return.
• Sovereign bonds experienced drawdowns, particularly in CCC-rated debt and long-duration securities (+30 years)

EM Credit

• EM corporates outperformed European and US investment grade and high yield segments.
• Investment grade outperformed high-yield, with CCC-rated bonds lagging B and BB-rated debt.
• Defensive sectors like financials and utilities posted positive total returns.
• Short-duration credit outperformed the broader market.
• New issuance surged to U$47.8 billion, more than double the same month in 2024.
• Investment grade dominated issuance (87%), while high-yield supply shrank for the fourth consecutive month.

Rating actions

• Poland: Fitch affirmed Poland at A- with a stable outlook, citing its resilient economy and strong macroeconomic policies anchored by EU membership.
• Romania: Fitch maintained a negative outlook on the country’s BBB- rating due to political uncertainty, record deficits and social polarization.

Country-specific news

• In Turkey, authorities detained President Erdogan’s top rival on corruption charges, increasing political tensions. Meanwhile, the central bank hiked rates to 46% to stabilize markets.
• Hungary’s central bank kept rates unchanged, with a delayed inflation target and tight monetary policy guidance.
• The Czech National Bank left its base interest rate at 3.75%, in line with expectations.
• Mexico’s Banxico cut the policy rate by 50bps to 9.00%, maintaining a dovish tone. Meanwhile, the US announced a 25% tariff on imported vehicles, impacting Mexico as a major auto supplier.
• The central bank of Brazil hiked rates by 100bps to 14.25%, with the Selic rate expected to peak at 15%. The real interest rate of 9.2% is the highest among covered central banks.
• Peru’s central bank held rates at 4.75%, assessing the inflationary impact of global trade wars.
• In Asia, China’s Two Sessions meetings set a 2025 GDP growth target of 5%, with a focus on boosting consumption and preventing real estate defaults. Meanwhile, Japan, China and South Korea held trilateral trade talks, signalling improved relations and a possible free trade agreement.

All sources are Bloomberg unless otherwise stated.

Past performance is not a reliable indicator of current or future results.

Market Data

Credit

Past performance is not a reliable indicator of current or future results.

Source: ICE data platform. as of 31st March 2025. EMGB - ICE BofA Emerging Markets External Sovereign Index EMCB - ICE BofA Emerging Markets Corporate Plus Index,  EMIB - ICE BofA High Grade Emerging Markets Corporate Plus Index, EMHB - ICE BofA High Yield Emerging Markets Corporate Plus Index, Q690 - ICE BofA Custom Emerging Markets Short Duration Index, EMRA - ICE BofA Asia Emerging Markets Corporate Plus Index, EMIA - ICE BofA High Grade Asia Emerging Markets Corporate Plus Index, EMHA - ICE BofA High Yield Asia Emerging Markets Corporate Plus Index , EMRL - ICE BofA Latin America Emerging Markets Corporate Plus Index, EMIL - The ICE BofA High Grade Latin America Emerging Markets Corporate Index, EMHL - ICE BofA High Yield Latin America Emerging Markets Corporate Plus, EMRE - ICE BofA EMEA Emerging Markets Corporate Plus Index, EMIE - ICE BofA High Grade EMEA Emerging Markets Corporate Plus Index, EMHE - ICE BofA High Yield EMEA Emerging Markets Corporate Plus Index,. Index performance is for illustrative purposes only. You cannot invest directly in the index. Indices selected provide best proxy for highlighting performance of emerging market corporate bonds. For illustrative purposes only. 

Yield to Worst

Source: ICE data platform. as of 31st March 2025. EMGB - ICE BofA Emerging Markets External Sovereign Index EMCB - ICE BofA Emerging Markets Corporate Plus Index,  EMIB - ICE BofA High Grade Emerging Markets Corporate Plus Index, EMHB - ICE BofA High Yield Emerging Markets Corporate Plus Index, Q690 - ICE BofA Custom Emerging Markets Short Duration Index, EMRA - ICE BofA Asia Emerging Markets Corporate Plus Index, EMIA - ICE BofA High Grade Asia Emerging Markets Corporate Plus Index, EMHA - ICE BofA High Yield Asia Emerging Markets Corporate Plus Index , EMRL - ICE BofA Latin America Emerging Markets Corporate Plus Index, EMIL - The ICE BofA High Grade Latin America Emerging Markets Corporate Index, EMHL - ICE BofA High Yield Latin America Emerging Markets Corporate Plus, EMRE - ICE BofA EMEA Emerging Markets Corporate Plus Index, EMIE - ICE BofA High Grade EMEA Emerging Markets Corporate Plus Index, EMHE - ICE BofA High Yield EMEA Emerging Markets Corporate Plus Index,. Index performance is for illustrative purposes only. You cannot invest directly in the index. Indices selected provide best proxy for highlighting performance of emerging market corporate bonds. For illustrative purposes only. 

References

1.Bank of America Global Research, as of 10th March 2025. Brazil Primer “Brasilopedia: Fiscal – I’m still here.”
2.Valor International Markets, as of 9th January 2025. “Brazil’s Central Bank makes record dollar intervention in December”.
3.S&P Capital IQ, as of 31st March 2025
4.JP Morgan, as of March 2025. EM Corporate Credit Chartbook

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of April 2025 and may change without notice.

--------

Index descriptions

EMGB - ICE BofA Emerging Markets External Sovereign Index tracks the performance of US dollar and euro denominated emerging markets sovereign debt publicly issued in the major domestic and eurobond markets.  Qualifying securities must have risk exposure to countries other than members of the FX-G10, all Western European countries and territories of the US and Western European countries.

EMCB - ICE BofA Emerging Markets Corporate Plus Index tracks the performance of the US dollar and euro denominated emerging markets non-sovereign debt publicly issued in the major domestic and eurobond markets. Qualifying issuers must have risk exposure to countries other than members of the FX G10, all Western European countries, and territories of the US and Western European countries.

EMIB - ICE BofA High Grade Emerging Markets Corporate Plus Index is a subset of the ICE BofA ML Emerging Markets Corporate Plus Index (EMCB) including all securities rated AAA through BBB3, inclusive.

EMHB - ICE BofA High Yield Emerging Markets Corporate Plus Index is a subset of the ICE BofA ML Emerging Markets Corporate Plus Index (EMCB) including all securities rated BB1 or lower.

Q690 - ICE BofA Custom Emerging Markets Short Duration Index tracks the performance of short-term US dollar and euro denominated emerging markets non-sovereign debt publicly issued in the major domestic and eurobond markets.

EMRA - ICE BofA Asia Emerging Markets Corporate Plus Index is the subset of the ICE BofAML Emerging Markets Corporate Plus Index, which includes only securities issued by countries associated with the region of Asia, excluding Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan.

EMHA – The ICE BofA High Yield Asia Emerging Markets Corporate Plus Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BB1 and lower with a country of risk within the Asia region.

EMIA -  The ICE BofA High Grade Asia Emerging Markets Corporate Plus Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BBB3 and higher with a country of risk within the Asia region.

EMRL - ICE BofA Latin America Emerging Markets Corporate Plus Index is a subset of The ICE BofA Emerging Markets Corporate Plus Index including all securities issued by countries associated with the geographical region of Latin America.

EMIL - The ICE BofA High Grade Latin America Emerging Markets Corporate Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BBB3 and higher with a country of risk within the Latin America region.

EMHL - ICE BofA High Yield Latin America Emerging Markets Corporate Plus is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated sub-investment grade based on the average of Moody's, S&P and Fitch, and with a country of risk associated with the geographical region of Latin America.

EMRE - ICE BofA EMEA Emerging Markets Corporate Plus Index is a subset of The ICE BofA Emerging Markets Corporate Plus Index including all securities issued by countries associated with the geographical region of Europe, the Middle East and Africa including Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan.

EMIE - ICE BofA High Grade EMEA Emerging Markets Corporate Plus Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BBB3 and higher with a country of risk within the Europe, Middle East and Africa regions.

EMHE - ICE BofA High Yield EMEA Emerging Markets Corporate Plus Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BBB3 and higher with a country of risk within the Europe, Middle East and Africa regions.

The MSCI EM Index is a free-float weighted equity index that captures large and mid cap representation across emerging market countries. The index covers approximately 85% of the free float-adjusted market capitalisation in each country.

LDMP - ICE BofA Local Debt Markets Plus Index is designed to track the performance of emerging markets sovereign debt publicly issued and denominated in the issuer's own currency.

J0A0 - The ICE BofA ML US Cash Pay High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt, currently in a coupon paying period that is publicly issued in the US domestic market.

C0A0 - The ICE BofA ML US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market.

HE00 - The ICE BofA ML Euro High Yield Index tracks the performance of EUR dominated below investment grade corporate debt publicly issued in the euro domestic or eurobond markets.

ER00 – The ICE BofA ML Euro Corporate Index tracks the performance of EUR denominated investment grade corporate debt publicly issued in the eurobond or Euro member domestic markets.

ICE BofA High Yield Emerging Markets Corporate Plus India Issuers Index (EINH) - is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities with India as the country of risk that are rated sub-investment grade based on average of Moody's, S&P and Fitch

ADOL -The ICE BofA Asian Dollar Index tracks the performance of U.S. dollar denominated sovereign, quasi-government, corporate, securitized and collateralized debt publicly issued in the U.S. domestic and eurobond markets by Asian issuers.

ADHY - ICE BofA Asian Dollar High Yield Index tracks the performance of sub-investment grade U.S. dollar denominated sovereign, quasi-government, corporate, securitized and collateralized debt publicly issued in the U.S. domestic and eurobond markets by Asian issuers.

You cannot invest directly in an index, which also does not take into account trading commissions or costs. Additionally, indices do not include reinvestment of dividends, and the volatility of indices may be materially different over time.

Important information

Muzinich and/or Muzinich & Co. referenced herein is defined as Muzinich & Co., Inc. and its affiliates. Muzinich views and opinions.  This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall.

Any research in this document has been obtained and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and no assurances are made as to their accuracy. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and this judgment may prove to be wrong. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only.

This discussion material contains forward-looking statements, which give current expectations of future activities and future performance. Any or all forward-looking statements in this material may turn out to be incorrect. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Although the assumptions underlying the forward-looking statements contained herein are believed to be reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurances that the forward-looking statements included in this discussion material will   prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Further, no person undertakes any obligation to revise such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

United States: This material is for Institutional Investor use only – not for retail distribution. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC.

Issued in the European Union by Muzinich & Co. (Ireland) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland, Company Registration No. 307511. Registered address: 32 Molesworth Street, Dublin 2, D02 Y512, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom. 2025-04-09-15845