Brazil's External Debt: A Return to the Early 2000s?
CEIC Brazil Data Talk: Brazil's external debt to GDP ratio declined marginally to 13.8% during the third quarter of 2013 from 14.2% during the previous quarter, as its external debt – inclusive of intercompany loans – declined to USD471.36 billion from USD476.60 billion. Matched against its foreign trade statistics, Brazil's external debt stood at approximately 1.3 quarters of exports, unchanged from the previous quarter. However, debt servicing rose to 31.3% of exports and 3.4% of GDP during the third quarter of 2013, from 25.5% and 2.7% during the previous quarter and the highest levels since 2007. At the same time, Brazil's international reserves amounted to just 5.0 quarters of debt service in July-September 2013, down from 6.1 quarters during April-June or a recent high of 8.1 quarters in July-September 2012. High external debts have been a cause of concern for Brazil, especially given its experiences during late 1990s and early 2000s when increasingly unsustainable external debt levels increased the country's vulnerabilities to a possible financial crisis. Indeed, at first glance, the presently high external debt level displays some characteristics similar to the near crisis almost a decade ago especially the relatively low share of external debt denominated in the Brazilian Real. Just 4.19% of Brazil's external debts were denominated in Brazilian real as of the second quarter of 2013 compared to 88.94% of external debt in US dollars. As in the early 2000s, the sharp depreciation of the Brazilian real has increased the overall cost of servicing these debts – both the principal repayment and interest payments. The real traded at a staggering BRL3.797/USD during October 2002, having fallen from BRL2.380/USD in January 2002, and BRL1.806/USD during January 2000. Similar depreciation has been observed during 2012-2013. Declining investor appetite in the emerging markets – coinciding with increasing risk in the global financial system and the US Federal Reserve's June 2013 announcement that it may scale back its asset repurchase programme by mid-2014 – has weighed heavily on the Brazilian real. The real depreciated to BRL2.341/USD during August 2013 from BRL2.028/USD at the beginning of the year and BRL1.675/USD during January 2011. While sharp depreciation pressures may be reminiscent of a return to the 2002 external debt scenario, present-day Brazil enjoys several saving graces in mitigating some of its vulnerabilities. For instance, Brazil holds substantial official reserve assets and international reserves, allowing it to ameliorate potential vulnerabilities in its financial system and support the currency. As of the third quarter of 2013, its official reserve assets amounted to approximately 16.5% of GDP. This compares favourably with the early 2000s where its official reserve assets were less than 10% of GDP (averaging around 6.3% from 2000-2002). The present deterioration of its international reserves – while a cause for concern – pales in comparison to the scenario during the early 2000s when its international reserves constituted less than one quarter of its debt servicing costs. Overall risks from short term debts have also been relatively small – indeed, as of 2012, short term external debt amounted to just 1.45% of GDP compared to 4.64% during 2002 and 4.99% during 2001 – indeed, overall short term debt has been declining as a proportion of overall external debt. Brazil's present external debt requires monitoring, given the increased risks both from rising indebtedness and currency depreciation. However, these risks should not be viewed in isolation and instead should be evaluated vis--vis a more holistic set of indebtedness indicators. The US Federal Reserve's recent decision to reassess its decision to scale back its monetary stimulus may help. By Bruno Vasconcelos - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog