Emerging Markets : Making The Grade



Brazil’s agricultural output is helping boost its economy

Brazil moved closer to a coveted investment-grade rating in May as both Standard & Poor’s and Fitch upgraded the sovereign to BB+ from BB. The rating puts it just one notch below investment grade and one notch above Brazil’s sovereign ratings by Moody’s. “We believe that [Moody’s is] likely to upgrade Brazil in the next couple of quarters … as the country moves to a position of being a net external-sector creditor,” says a report by Bear Stearns. The investment bank predicts the country could achieve an investment-grade rating by the end of 2008 if it establishes greater fiscal credibility, further reduces the debt-to-GDP ratio, sparks higher GDP growth and keeps inflation in check. “Some developments on the reform front—even timid ones—would be needed,” adds the report, noting that the upgraded outlook could cause Brazilian debt spreads to narrow over the medium term.

The Brazilian finance ministry lowered its forecast for the Selic benchmark interest rate to 9.5% for 2010 from a previous forecast of 10.1%. According to the revised projection, the Selic should drop to 12.1% this year (having already been cut to 12.5% in May) and to 10.7% by the end of 2008. By the end of 2009 the rate should fall to 10%. Likewise, net public sector debt as a percentage of GDP should fall to 36% by end-2010 from an expected 43.9% at end-2007. The government had initially predicted the ratio would end 2007 at 48.3% and 2010 at 39.7%.

BM&F;, Brazil’s mercantile and futures exchange, launched a futures contract for ethanol, which began trading on May 18. Prior to the move, unveiled in both São Paulo and New York, prices had been set on a historical basis. Under the new system, the contract matures each month and can be used for delivery in Brazil or abroad.

Antonio Guerrero