Investors, and bond investors in particular, complacent about Brazil pension reform and fiscal position
The weakened Temer government - which had once promised a "bridge to the future" - bowed to the politically inevitable this week when it sharply revised up its 2017-20 primary deficits targets. While this comes as little surprise - indeed we have long forewarned it will happen - the trend is clearly at odds with the Temer administration's long-touted goal of returning Brazil to the path of fiscal sustainability. Although the market reacted well initially we still see a serious risk of a downgrade before yearend.
S&P cut Brazil's rating to BB- on 11 January 2018. Fitch followed suit and cut to BB- on 23 February 2018. In the 12 month's since publication the real lost 29% vs. USD and 10y bond yields rose from 10.11% to 12.40%