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Friday, February 22, 2008

Brazil Becomes Net Creditor for First Time in January 2008

Brazil, the world's largest emerging-market debtor for decades, became a net foreign creditor for the first time in January. International reserves, swelled by investment inflows and record exports of agricultural commodities and oil, probably exceeded gross foreign liabilities last month by about $4 billion, the Banco Central do Brasil said today in a report.

Brazil's shift to net creditor status may add to already growing investor confidence in what is Latin America's largest economy and help the country achieve investment-grade rating. Brazil finished paying off its debt to the International Monetary Fund in December 2005.

Brazilian exports have tripled since President Luiz Inacio Lula da Silva took office in 2003 on rising world demand for soybeans, iron-ore, beef and cars. An accompanying surge in foreign direct investment, including stock and bond purchases by non-residents, has led the currency to appreciate to what is its strongest level in more than eight years.

International reserves, including cash and other financial assets, rose to a record $171.6 billion in January, more than ten times the $17 billion that the country had when Lula assumed power. At the end of 2003, Brazil's debt topped international reserves by $165 billion, the bank said.

Foreign bond buyers have been lured by the prospect Brazil could attain an investment grade rating this year or next, making the country's bonds the world's second-best performer over the past five years, returning 191 percent, according to JPMorgan Chase & Co. data. Only Ecuadorean bonds, which gained 234 percent, rose more.

Brazil's foreign currency debt rating of BB+ by Standard & Poor's and Ba1 by Moody's Investors Service are both one level below investment grade. Investment-grade standing gives a country greater access to international capital at lower borrowing costs.

The yield to the 2015 call date on Brazil's 11 percent bonds due in 2040, one of the most widely traded emerging-market securities, fell 9 basis points, or 0.09 percentage point, to 5.59 percent, according to JPMorgan Chase & Co. The bond's price rose 0.6 cent to 132.65 cents on the dollar.

The world economic slowdown may test whether Brazil's efforts to diversify export markets and bulk up reserves are enough to safeguard long-term growth after almost five years of record commodity exports and low borrowing costs.

An over-dependence on commodity sales abroad may cut Brazil's growth to 3 percent this year from about 5 percent should a slowing U.S. economy reduce demand, according to a Morgan Stanley report released Dec. 10.

The real rose for a fourth straight session, advancing 0.8 percent to 1.7095 per dollar today. It touched 1.7046 earlier in the day, the strongest level since May 1999. The central bank has purchased U.S. dollars in currency markets almost every day since July 2006 to slow the real's appreciation and increase international reserves.

In a separate report, the bank and the National Treasury said that local and foreign debt fell 1.7 percent to 1.31 trillion reais in January from December. The stock of local debt, which makes up 90 percent of total Brazilian liabilities, fell 1.7 percent and foreign debt dropped 1.4 percent last month, both institutions said.


Richard said...

Following the election of President Lula da Silva the situation in Brazil has dramatically changed, at least in direct respect of the economy. For example, through economic diversification, productivity improvements, higher international commodity prices and overall economic reform,still law price of Brazil property, Brazil is now believed to be on the cusp of achieving investment-grade rating by the likes of Moody’s and Standard & Poor’s. This total transformation has taken a great deal of time and effort – but it has been tried, tested and not shown to be precarious. Which is why the local currency is riding higher than it has since May 1999 against the US dollar according to a Bloomberg report, why investors are buying in to the Brazilian stock market and why so much direct investment is flowing specifically into property market.

Edward Hugh said...

Hi Richard,

I very much agree that Brazil is definitely on the up and up. Good policy is part of the story, but Brazil also now has a very favourable demographic background, which should hold her up to some extent even in the credit crunch makes the emerging market position more complicated.