Emerging Markets : Brady bonds buyback bonanza


Taking advantage of high international reserves of nearly $57 billion and strong international liquidity, the Brazilian National Treasury launched a program in January to buy back its outstanding Brady bonds as well as other short-term government instruments maturing before 2010. An estimated $16 billion to $20 billion worth of government securities fit the profile.

The program, which will run through the end of the year and will be managed by the central bank, aims to improve Brazils debt profile. The government is dipping into its reserves to fund the program. Authorities announced that they had already bought back an estimated $2.3 billion worth of debt on the secondary market by mid-February.

The amount could soar if a government proposal to exempt foreigners from a 15% tax on securities trading is approved. While the government contends the measure would attract investors and improve the countrys debt profile, both of which could bode well for the sovereigns much-awaited upgrade to investment grade, exporters are concerned that strong dollar inflows could further strengthen the real and dampen competitiveness.

After posting a $44.7 billion trade surplus in 2005its largest everBrazil is concerned over the pace at which imports are growing, particularly from China. Both countries signed an agreement in February by which Brazil will limit the amount of textiles it imports from China through 2008. Brazilian imports of Chinese textiles jumped by 35% in terms of volume (43% in terms of value) year-on-year in 2005, having already jumped by 98% in volume (65% in value) in 2004.

Brazils companies are enjoying increased credibility as a growing number achieve investment-grade status. In February Aracruz Celulose, a major paper producer, became the eighth Brazilian company to receive an investment-grade rating, this time from Moodys. The rating agency already rates oil giant Petrobras, mining company CVRD, paper company Aracruz and airplane manufacturer Embraer as investment grade.

Standard & Poors rated Votorantim Celulose e Papel (VCP), one of Latin Americas largest paper producers, as investment grade in early February, after granting similar recognition to Grupo Votorantim, the industrial conglomerate that controls VCP, and to the local operations of mining multinational Alcoa. Fitch and S&P; both rate AmBev, Brazils largest bottler, as investment grade. Companies expect the upgrades will attract institutional investors, particularly international pension funds.

Antonio Guerrero