ORLANDO, Florida, Jan 27 (Reuters) - Brazil has been significantly affected by the strengthening dollar and rising U.S. bond yields. Despite this, the country may not be a target of the looming punitive tariffs as President Donald Trump takes aim at various U.S. trade partners.
While Brazil hasn't had a trade surplus with the United States since 2007, its current economic situation requires careful attention. Facing challenges akin to those of an emerging economy, the country finds itself in a tough spot: increasingly stringent financial conditions, record-high real yields surpassing 10% for over 15 years, and a historically weak currency.
To support the real, Brazil's central bank has raised rates by 100 basis points recently and plans for a further 200 bps increase. Although Brazil maintains a healthy primary fiscal balance, the escalating interest payments are straining public finances.
Moreover, the central bank has heavily intervened in the FX market, depleting $28 billion in reserves just in December, representing the largest drop in reserves in 19 years.
Investors are showing signs of concern, withdrawing a net total of $12.6 billion from debt and equity funds in December, marking the second-largest outflow since the central bank data series began in 1995.
Trump's potential re-election could introduce further complexities. Despite Brazil having a unique standing among major emerging economies, tensions could arise due to ideological differences between Trump and Brazil's left-wing leader Luiz Ignacio Lula da Silva, and friction with Elon Musk regarding social media control.
Brazil was previously targeted by Trump regarding the BRICS group of nations and could face indirect repercussions if trade disruptions occur. Any fallout from global trade interruptions, particularly with China, could lead to a harsh economic downturn in Brazil next year, according to analysts at TS Lombard.
Reflecting on Trump's initial presidency, there are contrasting implications for Brazil: trade dynamics with China shifted favorably for Brazil due to U.S.-China tariffs, although potential changes in China's agricultural imports could pose challenges for Brazilian exporters.
There's a concern that Lula might respond with protectionist measures if Trump's actions disrupt the economy. While the U.S. economy might weather such turbulence, Brazil's resilience may face more significant hurdles.