Brazil Debt Raised To Investment Grade By Standar and Poor's

Brazil yesterday received an investment grade credit rating for the first time from Standard & Poor's, sending the benchmark stock market index to a record and yields on dollar bonds to an all-time low.

Brazil, whose economy grew last year at the fastest pace since 2004, should be able to maintain annual growth of as much as 4.5 percent, S&P said in a statement. The country's long-term foreign currency debt rating was raised to BBB-from BB+. Foreign direct investment, which reached a record of $34.6 billion last year, is likely to cover the country's current account deficit this year, the ratings company said.

Brazilian exports have tripled since President Luiz Inacio Lula da Silva took office in January 2003 on rising world demand for soybeans, iron-ore, beef and cars. Brazil, once the world's largest emerging-market debtor, became a net foreign creditor for the first time in January as international reserves swelled to a record $171.6 billion from $37.6 billion at the start of Lula's first term. Credit-rating increases usually result in lower borrowing costs for nations and companies.

The Bovespa climbed 6.3 percent to 67,868.46 in Sao Paulo trading, making the index this year's best performer among the world's 20 biggest stock markets. The real strengthened 2.6 percent to 1.6623 versus the U.S. dollar, the biggest one-day gain in the currency since Aug. 17, when the Federal Reserve unexpectedly cuts its discount rate.

The yield to the 2015 call date on Brazil's 11 percent bonds due in 2040 fell by 21 basis points to 5 percent in New York, according to JPMorgan Chase & Co. The price rose 1.602 cents on the dollar to 136.301 cents, the highest since the country issued the securities in 2000.

Brazil's federal debt was 1.36 trillion reais ($813.8 billion) in March, the Treasury said April 24. Foreign debt was 106.3 billion reais. Brazil is rated Ba1, or one level below investment grade, by Moody's Investors Service. Fitch Ratings ranks the country at BB+.

Brazil's rating is now in line with those of Colombia and Romania and is four steps higher than its level in July 2002. In Latin America, Mexico and Chile, whose economies are smaller than Brazil's, have a higher rating.

Brazil's economy expanded 5.4 percent in 2007 and is expected to grow 4.6 percent in 2008, according to estimates of about 100 economists in a central bank survey.

The acceleration in growth prompted Brazil's central bank on April 16 to raise its benchmark lending rate for the first time in three years as inflation accelerated above their 4.5 percent target. Rising food costs and consumer demand pushed inflation to a two-year high of 4.73 percent in March from an eight-year low of 3 percent in the prior year's period. Economists now expect policy makers to raise their target rate to 13 percent by year- end, with annual inflation estimated to reach 4.79 percent this year, a central bank survey published April 28 showed.

High government spending and public debt remains Brazil's ``foremost credit weaknesses," S&P said. Net government debt reached 47 percent of the country's gross domestic product in 2007, ``higher than in similarly rated credits and above 20 percent for the BBB median,"

Update

The FT had an interesting article on this topic today. Perhaps the central point was this one:

Brazil is still a long way from the top-notch triple A ratings of the developed economies, such as the US, Britain and Germany, but its rise out of junk or speculative grade is important as it allows some of the biggest pension and insurance funds to invest in the country. Many of these big institutions are not allowed to channel funds into countries rated below investment grade because of the dangers that these economies will default, losing their clients vast sums of money.

Also today Moody's announced their view on investment grade for Brazil. Moody's - which rates Brazil's foreign currency debt Ba1, one rank below investment grade - stated that Brazil must reduce debt and spending while lengthening the maturity of its government securities before it can earn an investment-grade credit rating. Standard & Poor's last week raised Brazil to investment grade, citing pragmatic fiscal policies and stronger economic growth.

``There are two elements that are important when you move a rating -- you need all the support behind the improvement of fundamentals, and those elements are there in Brazil,'' according to Mauro Leos, vice president and senior credit officer at Moody's in New York. ``You also need a serious reduction of liabilities.''

An increase in government spending as a percent of gross domestic product over the last five years, largely because of higher pension payments, is the principal challenge, according to Moody's.

``The upward trend in primary spending, which went from 15 percent of GDP in 2003 to 18 percent in 2007, reflects the evolution of pension payments.... Still, Brazil's debt ratios remain high relative to the Baa investment-grade peer group and, in some cases, when compared with the Ba non-investment-grade peer group......Standing at some 56 percent of GDP, Brazil's government debt ratio compares with a 34 percent debt-to-GDP ratio for the Baa investment-grade peer group.''


Moody's will evaluate improvements in Brazil's fiscal accounts through the third quarter this year and then decide if the country can receive a positive outlook.Should a positive outlook be awarded, Brazil would then be placed under review before it could claim an investment rating.

Pension payments, which account for more than 40 percent of primary government spending, have increased in absolute and relative terms because more than half of benefits paid are indexed to the minimum wage, Moody's said. The minimum pension has experienced over 10 percent real annual growth since 2003 when President Luiz Inacio Lula da Silva took office.

A commitment to primary surplus targets and declining interest rates have been helping contain the debt-load, and the ratio of gross debt to GDP declined to 55.6 percent in 2007 from 58.4 percent in 2003.

Brazil Central Bank Raises Interest Rates

As indicated on this blog yesterday Brazil’s central bank have increased interest rates - although they surprised markets with a 0.5 percentage point increase, double the amount most economists expected. The rise brought to an end more than two years of rate cuts amid mounting concerns that consumer price inflation will exceed the government’s target this year.

The bank’s monetary policy committee (Copom) had held its target overnight rate, known as the Selic, at 11.25 per cent since the autumn of last year, after two years of cuts from a peak of 19.75 per cent. The bank in October held the benchmark rate at 11.25 percent, ending the longest monetary easing cycle since Brazil adopted inflation targets in 1999.



The real closed at R$1.66 to the dollar on Wednesday, its strongest level in nine years, on the back of the expected rate increase.

The Copom said it had opted for a 0.5 point increase as it wished to act immediately by introducing significant part of the monetary tightening that would be necessary to reduce the risk of rising inflation and reduce the size of the total increase to be implemented in the Selic rate.

Latin America's biggest economy grew 6.2 percent in the fourth quarter of 2007, more than twice the pace of the past decade. Bank lending, which has almost doubled in the past three years and is fueling purchases of cars and other big-ticket items, is powering economic growth and sparking inflation. Brazil's economy expanded an average of 3.8 percent from 2003 to 2007, the second slowest in South America. Argentina led the region with 8.8 percent, followed by Venezuela with 7.9 percent and Uruguay with 6.9 percent, according to International Monetary Fund data.

A surge in food prices and rising consumer demand have pushed annual inflation in Brazil from an eight-year low of 3 percent in March 2007 to a two-year high of 4.73 percent in March, above policy makers' year-end target for a third month. Brazil has the second slowest inflation in the region, after Mexico, according to Bloomberg data. In Chile, inflation has jumped to 8.5 percent in March from 2.6 percent in the year- ago month.

Over the past two years consumer demand has taken over from the export sector as the main driver of growth in Brazil. Falling unemployment, rising salaries and cheaper credit have driven a consumption boom, especially of credit-sensitive items such as cars and household electrical goods. About 2.4m vehicles were sold in Brazil last year – an increase of nearly 28 per cent over 2006. Strong demand continues across the economy this year. Retail sales in February were up by 12 per cent, year on year.

Lending by banks has climbed at least 20 percent in each of the past three years. Car sales jumped 30.5 percent in February from the year ago month, while home appliance and furniture sales climbed 17.8 percent, according to figures from the national statistics agency.

Brazil Retail Sales February 2008

Brazil's retail sales in February rose at the fastest pace since June 2004, raising expectations that the central bank will raise interest rates tomorrow. Retail, supermarket and grocery store sales, as measured by the volume index, jumped 12.2 percent in February from February 2007, the national statistic agency said this morning. The pace of economic expansion does seem to be slowing, however, since seasonally adjusted sales fell 1.5 percent on a month by month basis in February from January. Sales in the quarter which ended in February were up 0.3 percent compared with a 1.4 percent jump in the previous quarter.

Policy makers, led by central bank President Henrique Meirelles, are now widely expected to increase the benchmark interest rate tomorrow for the first time in three years. The consensus seems to be an expectation for the bank to increase the rate to 11.50 percent from the current record low 11.25 percent.

Brazil's annual inflation has steadily accelerated since November. Consumer prices in the 12 months through March rose 4.73 percent, the highest since March 2006, and greater than the central bank's target of 4.5 percent, plus or minus 2 percentage points.



What is Latin America's biggest economy grew 6.2 percent in the last quarter of 2007, more than twice the pace of the last decade. Commodity exports and bank lending, which has almost doubled in the past three years and is fueling purchases of cars and other big-ticket items, is powering economic growth.

Yields on interest-rate futures rose after the report was released. The yield on the overnight contract for May delivery increased 2 basis points, or 0.02 percentage point, to 11.43 percent.

The yield on Brazil's zero-coupon bonds due in January 2010 rose 4 basis points to 13.37 percent, according to Banco Bradesco SA.

Brazil's real gained on the news and was up 0.2 percent to 1.6832 per dollar at 4:48 p.m. New York time, from 1.687 yesterday. It had risen by as much as 0.6 percent earlier in the day. Brazil's currency has appreciated by 20.2 percent over the past 12 months, the second-best performance (after the Swiss franc) among the 16 most traded currencies.


Brazil's Bovespa index also rose for the first time in three days, gaining 464.94, or 0.8 percent, to 62,618.39. 37 stocks rose and 26 fell.

Brazil Inflation March 2008

Brazil's annual inflation rate, as measured by the government's IPCA index, climbed to 4.73 percent in March, the highest rate in two years and above the central bank's 4.5 percent annual target. Consumer prices rose 0.48 percent in the month, increasing speculation the central bank will raise interest rates next week for the first time in three years.




Yields on Brazil's overnight interest-rate futures contract for January delivery jumped 10 basis points to 12.46 percent. That's more than 1 percentage point above the central bank's benchmark overnight rate of 11.25 percent.

Central bankers considered raising the benchmark rate last month to slow demand and curb inflation, minutes of the march 4-5 meeting showed. Policy makers boosted their 2008 inflation forecast on March 27 to 4.6 percent, above their annual target rate.

Brazil's real strengthened for a seventh day, gaining 0.3 percent to 1.6885 per dollar. It has advanced 19.9 percent in the past 12 months, the third-biggest gain among the 16 most-traded currencies against the dollar.

Brazil Industrial Output February 2008

Brazil's industrial output climbed the most in four months in February, increasing expectations policy makers may raise interest rates to rein in the economy's expansion as inflation remains above the central bank target. Output climbed 9.7 percent in February from February 2007, the government said today. It was the 20th straight gain in year-on year industrial production. The annual rate of increase for 2007 was 6 percent, twice the pace of 2006, this was the fastest rate since 2004, when output grew by 8.3 percent.



Cheaper credit and record low unemployment rates have bolstered domestic demand and industrial production. The February gain was more than the revised 8.7 percent increase in January. Driving overall production up in February was the output of capital goods, which rose 25 percent from the year ago month, the agency said. Production of durable goods, such as cars, jumped 20.7 percent.

Brazil's trade surplus also widened to $1.01 billion in March from $882 million the previous month, the Trade Ministry said in a separate announcement. However it is far from clear how this position will evolve moving forward, and Brazil's trade surplus is expected to narrow to $27 billion this year from $40 billion in 2007, according to the most recent central bank forecast. The smaller surplus may lead Brazil to have a current account deficit in the region of $12 billion this year compared with a surplus $1.46 billion surplus in 2007, the bank said.

Coffee exports from Brazil, the world's biggest producer, also weakened last month, falling 5.4 percent in March from February, according to Brazil's Coffee Exporters Council. Brazil shipped 1.72 million bags of coffee beans last month, compared with 1.82 million bags a month earlier.


On the other hand Brazilian inflation accelerated in annual terms in February - although it slowed slightly in monthly terms when compared with January. Consumer prices, as measured by the benchmark IPCA index, rose 0.49 percent in February, compared with a 0.54 percent increase in January, the national statistics agency said last month. The annual inflation rate in February remained above the central bank's 4.5 percent target for a second straight month. Inflation quickened to 4.61 percent in the 12 months through February from 4.56 percent in the previous period.



The central bank said in the minutes of its March 4-5 meeting it considered raising the benchmark interest rate to hold demand, as inflation remained above the 4.5 percent annual consumer prices target. Policy makers, led by central bank President Henrique Meirelles, target annual inflation of 4.5 percent, plus or minus 2 percentage points to accommodate unexpected price shocks.

At the bank's March 4-5 meeting, the board considered raising rates for the first time since October, when they snapped the longest monetary easing cycle since the adoption of inflation targets in 1999. The board voted unanimously to keep the rate unchanged at 11.25 percent for the fourth straight meeting. On March 27, policy makers in their quarterly report increased their forecast for 2008 inflation to 4.6 percent from a previous 4.3 percent.