Grim circumstances and various miscues may already be reflected in market pricing.

Brazil has been in the news recently. A toxic mix of political dysfunction, fiscal stress and COVID-19 has triggered a sell-off of its currency and put pressure on local rates.

The Brazilian real was the second-worst-performing currency in 2020, falling more than 22% versus the U.S. dollar. So far in 2021, it has depreciated almost 6%, trailing even the Turkish lira. In local rates, Brazil’s treasury curve has widened over 250 bps. However, in hard currency, things haven’t been nearly as painful. Sovereign spreads are only around 25 bps wider this year, while non-sovereigns are essentially flat.

Not unlike many countries, Brazil deployed massive fiscal stimulus last year to cushion the impact of COVID. But unlike stronger peers, Brazil was already under pressure to consolidate its fiscal accounts. Political bickering and a sometimes erratic President only compounded the problem. And so, the bill arrived, largely via pressure on FX and rates.

Most recently, a Supreme Court justice annulled former President Lula’s convictions for corruption and money laundering, paving the way for the still-popular leftist to run against current President Bolsonaro in next year’s general election. A local commentator captured it eloquently— in Brazil, even the past can be uncertain.

But there is also good news. The country’s institutional framework has been successfully tested. Despite a fragmented political system, the government passed a targeted second COVID emergency package without violating its fiscal rule. The Central Bank’s independence has been ratified by Congress. And Brazil has continued to pursue orthodox macroeconomic policies, guided by a competent and pro-reform economy minister.

We also might be seeing a bit of an overreaction. The markets have often worried about a large public-debt-to-GDP ratio that has grown from around 70% in 2019 to 90%, overlooking that, net of intragovernmental debt holdings, the ratio drops by around 20%. Further, economic recovery in 2021 and the preservation of the fiscal ceiling point to a gradual, albeit extended, return to pre-pandemic levels. Externally, the country’s balance sheet remains solid, with large reserves and low public external debt. A mix of a cheap currency and growing exports suggests that the external backdrop will remain strong if not improve. Risks remain, both “Made in Brazil” and imported, but opportunities will likely abound as plenty of bad news is already seemingly priced in.