Emerging Markets : Brazil Debuts Local Currency Sovereign Issue


Brazil issued its debut real-denominated bond issue on international markets in September. The R$3.4 billion ($1.5 billion) sovereign deal, which matures in 2016, was priced to yield 12.75% (vs. 15.5% for a domestic issue maturing in 2012). The benchmark issue was led by Goldman Sachs and JPMorgan Chase and co-led by Banco Ita.

The deal was oversubscribed by some $500 million, for which new issues are expected before year-end. Authorities say the issues will help reduce Brazils exposure to dollar-denominated debt. Several Brazilian corporates had already issued local currency deals on international markets earlier this year. The bond provides fiscal savings compared with domestic debt and avoids the balance sheet mismatch that foreign currency debt entails, says John Chambers, chairman of the Standard & Poors sovereign rating committee.

Investors are encouraged by the countrys improved economic outlook, with a central bank survey of analysts in September increasing the 2005 growth forecast to 3.26%. The improvement was sparked by real-income growth, declining inflation and a better-than-expected 3.9% GDP expansion during the second quarter. The central bank cut its Selic benchmark interest rate by a quarter point to 19.5% in September, after inflation fell to 0.53% from Augusts 0.65%a fifth consecutive monthly decline.

On the political front, President Luiz Incio Lula da Silvas public approval rating dropped to a record-low 50% in September, while the administrations approval also slid to a slim 35.8% amid an ongoing corruption scandal. Nevertheless, polls still show Lula will probably win reelection next year.

Antonio Guerrero