Koreans lose big on Brazil’s sovereign bonds

Korea’s soccer team was heckled and pelted with sweets when it returned from Brazil’s 2014 World Cup after failing to win a single match. Kwak Hee-soon, a housewife inspired by the tournament to buy the Latin American nation’s bonds, was also disappointed.

Kwak spent 50 million won ($45,230) of her savings on Brazilian sovereign bonds in June 2013, enticed by tax-free yields three times greater than at home and speculation the country would get a boost from the championship. The investment has soured as the host failed to make the final, the economy shrank for three straight quarters and the real plunged more than 30 percent against the won after commodity prices slumped.

“It was a tempting offer back then given the high interest rate and tax benefits,” said Kwak. “I’m disappointed with the outcome. I was told I wouldn’t lose money unless the real fell. I’ll need to be more careful next time when investing in overseas securities.”

Brazil’s central bank has raised its target rate by 5.5 percentage points to 12.75 percent from a record low 7.25 percent in April 2013 as the nation battled soaring inflation. Those yields lured South Korean retail investors, who bought at least 6.8 trillion won of Brazilian real sovereign bonds by the end of 2014, according to estimates from Korea’s seven brokerages. Most of those investments weren’t hedged against the currency fluctuations.

“The losses are huge, though part of them might be offset by the high coupon,” said Kim Sang-hoon, a fixed-income analyst at Hana Daetoo Securities. “Investors were expecting a gain from both the exchange rate and interest rates back then, as the real had appreciated against the Korean won for a couple of years with the commodity boom since the global financial crisis.”

The real appreciated about 30 percent against the won in the three years from the end of 2007 through 2010 after demand for the country’s commodities increased. The currency has depreciated 16 percent this year against the dollar, the biggest loser among 24 emerging-market currencies tracked by Bloomberg, amid concern the country may lose its investment-grade credit rating.

Brazil holds the lowest investment grade from Standard & Poor’s, which said in a March 24 report that waning public support, the economic contraction, and a widening corruption scandal at Petroleo Brasileiro S.A. are challenging President Dilma Rousseff. S&P estimates Brazil’s economy will contract 1 percent this year before real gross domestic product expands by 2 percent in 2016 and 2.3 percent in 2017.

“The Brazilian market will likely remain highly volatile mainly due to the political unrest,” said Joo Min-geun, a senior credit analyst at Franklin Templeton Investment Trust Management in Seoul. “Sober judgment may be needed for the short-term investors, but it could be an option for longer-term investors to wait for the economic recovery if the losses are already big.”

Bloomberg