Investors treat them very differently: there are rational reasons, but also complacency
Images of thousands of supporters of former President Jair Bolsonaro storming Brazil’s Congress, Supreme Court and presidential palace on Sunday were uncomfortable to watch in the United States. They were unnervingly similar to the invasion of the US Capitol by supporters of Donald Trump two years earlier. For investors, however, the two countries carry very different financial risks. That’s based on a mixture of rationality and perhaps some complacency.
Like the United States, Brazil was until recently led by an autocratic president who refused to concede electoral defeat. But the country is poorer and more dependent on natural resources. It has a history of near-defaults on local currency-denominated debt, as well as suffering from hyperinflation. It’s still somewhat shaky today: government debt was 74.5% of GDP in November and is rated just BB- by S&P. GDP per capita was lower in 2021 than it was a decade ago, according to the World Bank.
Brazil’s political history is also unfortunately dramatic, with multiple coups in the last century. Its most recent democracy, established in 1985, remains vulnerable. Over the past 10 years, Brazil has ranked among the worst countries for progress toward autocracy, according to Varieties of Democracy, a project that tracks commitment to democratic principles.
There is a strong correlation between authoritarian societies and corruption. The ability to remove people from power and prosecute them helps limit all kinds of abuse. Perhaps not surprisingly, Transparency International’s Corruption Perceptions Index ranks Brazil at 38 points, below the world average, where 100 reflects a nearly crime-free society. The United States scores substantially better, at 67, but still lags behind other developed countries. Both countries’ scores have declined over the past decade.
This is important because economic studies systematically link corruption to poor economic and social outcomes. Rent seeking proliferates and public spending loses effectiveness. Corrupt countries have lower GDP growth, lower investment, companies have more difficulty dealing with authorities, and public health and education are less effective.
For Brazil, this carries a cost in the financial markets. Its 10-year sovereign debt yields almost 13%. Meanwhile, investors view the US government as almost risk-free, demanding a return of around 3.5% on Treasury bonds of the same duration.
The United States’ more than 200-year commitment to democracy, while imperfect, inspires markets and citizens alike to assume that its foundations are stronger than Brazil’s. Let’s hope so. But if investors ever decide to demand a risk premium, it has a long way to go.
