Emerging Markets : Bond Bonanza



Henrique de Campos Meirelles

The Brazilian government continues to take advantage of favorable market conditions to issue real-denominated paper. The sovereign again reopened its real-denominated global bond issue in early December, selling an additional $346 million worth of the paper due in 2022. The bonds, placed through Morgan Stanley and Goldman Sachs, carried a 12.5% coupon and were priced to yield 11.663%. The bonds are the sovereigns longest-dated fixed-rate issue denominated in local currency.

The pricing was an improvement over the bonds first offering in September 2006, which yielded 12.88%. Another reopening in October was priced to yield 12.47%, reflecting the sovereigns improved credit profile and ongoing investor appetite. The latest reopening takes the issue to a total of $1.35 billion outstanding.

Standard & Poors revised its outlook on Brazils long-term credit ratings to positive from stable in late November, boosting the perception that the country is on a steady path toward achieving a coveted investment-grade rating. The ratings action, according to Standard & Poors analysts, reflects the ongoing decline in the countrys fiscal vulnerabilities. The ratings agency predicts the government in Brasilia will post an average general fiscal deficit of 3.5% in 2006-2007.

The Brazilian economy picked up toward the end of 2006, easing concerns over a possible slowdown. The nations GDP expanded by 3.2% year-on-year during the third quarter of 2006, compared with a 1.2% expansion during the previous quarter. Industrial production rose 4.8% in October 2006 over the same month in 2005, for a 2.9% cumulative increase between January and October. A 6.2% hike in automobile production in October accounted for much of the months output expansion. Analysts credited central banker Henrique de Campos Meirelless interest rate cuts for the economic recovery after the bank slashed the benchmark Selic rate to a record-low 13.25% on November 30.

Antonio Guerrero