The Brazilian private sector has increased its international debt to a greater degree than the sovereign, and it is not inconceivable that in a stress scenario, some of this debt could become a public-sector liability. Total (public and private) external debt has risen considerably in the past half decade, from roughly 1.5x annual export revenue in 2010 to nearly 2.5x by mid-2015. This reflects persistent and rising current account deficits associated with the demand-led policy framework and a more recent decline in export revenue resulting from the commodity price shock. The debt to export ratio is, for example, comparable to that of Colombia, slightly higher than Turkey's, and meaningfully higher than in Poland, South Africa, Hungary, and Mexico.
"We see the rise in (mainly private) external debt as a reflection of Brazil's demand-oriented policy framework in a world of ample international liquidity", notes Barclays.
Nothing can rise forever, and now that international investors have become unwilling to finance Brazilian deficits as large as they had recently, it is inevitable that debt accumulation will decelerate, with or without adjustments to the Brazilian policy framework. This highlights that the exchange-rate correction of the past two years is driven by lasting economic fundamentals, not only sentiment about the political crisis, and is therefore likely to persist. But it also highlights that a potential correction of external borrowing is primarily a problem for the exchange rate and need not involve anything resembling an international payments crisis.
Brazil's strong international liquidity position removes a constraint that has, in previous emerging market crises, blown the whistle on an unsustainable policy framework by creating an immediately unmanageable liquidity crunch. This does not make the policy sustainable but, for better or for worse, seems likely to postpone a day of reckoning and transfer the main risk from sovereign credit to monetary policy and the exchange rate.
