Emerging Markets : Investment Grade Looms for Brazil


Brazil continues to move closer to a coveted investment-grade rating, albeit slowly. In October Moodys upgraded the sovereigns foreign currency rating to Ba3 from B1 with a positive outlook, putting it three notches away from the top rating. The move came after Brazils debt fell from 51.8% of GDP in August to 51.4% in September, prompted by a strengthening real that is making it easier for the government to service its foreign currency-denominated obligations.

In November Standard & Poors revised its outlook on Brazils long-term local and foreign currency sovereign ratings to positive from stable. S&P; also reaffirmed its BB- long-term foreign, BB long-term local and B short-term foreign and local currency sovereign ratings.

The continued reduction in public and private sector external debt and impressive export performance reinforce the trend decline in Brazils external debt burden, says Lisa Schineller, S&P; credit analyst. Net of international reserves and other liquid assets, S&P; says Brazils external debt is projected at 90% of current account receipts in 2005-2006, compared to 270% in 2000.

Encouraged by positive ratings actions, the sovereign returned to international capital markets for the fourth time this year in November. It reopened its due-2015 issue with a $500 million offering. The sovereign has sold $6.9 billion abroad year-to-date.

Local corporates have also stepped-up their bond issuance. Telemar, Brazils largest fixed-line telecom company, was set to issue $150 million abroad, due in 2011, via Citigroup. CVRD, one of the worlds largest iron ore producers, sold $300 million of 30-year notes due in 2034, yielding 7.65%, in a deal reportedly twice oversubscribed. Banco Mercantil do Brasil upped its 8.75% due-2008 offering via Standard Bank and Finantia by $5 million, to $50 million, due to strong investor appetite.

More than 80% of fund managers surveyed by Morningstar say Brazil has the best outlook for economic growth over the next five years. The survey also found that Brazil is already home to 64% of asset managers Latin American holdings. Most respondents, however, worry about the potential impact of US interest rates on the region over the period.

Antonio Guerrero