Lift to Brazil credit rating boosts stock markets

Brazilian stock markets hit a record high yesterday after rating agency Standard & Poor’s lifted the country’s credit rating to investment grade, citing its economic expansion and declining foreign debt.

Brazil’s benchmark stock index, the Bovespa, surged more than 6 per cent to close at a record 67,853.89, its biggest one-day gain since November 2001.

Reaching investment-grade status is significant because it opens a country’s debt instruments to a wider range of large institutional investors, increasing and cheapening its access to credit and, in theory at least, stimulating faster growth.
The news helped to prompt a 2.46 per cent gain for the Brazilian real, which closed at R$1.663 to the US dollar.

Meanwhile, the extra yield investors demanded to own Brazil’s dollar bonds rather than US Treasuries narrowed nine points to 2.19 percentage points, according to JPMorgan. Spreads on Brazil’s sovereign bonds over comparable US Treasury bonds have fallen from more than 22 percentage points in late 2002.

According to Lisa Schineller, credit analyst at Standard & Poor’s, Brazil is the 14th sovereign whose foreign currency debt has been raised to investment grade. The move brings Brazil into line with the other BRIC countries - Russia, India and China - which all enjoy investment grade status, and opens the way for an acceleration of investment in the Latin giant.

“The upgrades reflect the maturation of Brazil’s institutions and policy framework, as evidenced by the easing of fiscal and external debt burdens and improved trend growth prospects,” said Ms. Schineller.

“Net general government debt remains higher than that in many ‘triple B’ peers, but a fairly predictable track record of pragmatic fiscal and debt management policies mitigates this risk,” she added.

James Quigley, chairman of Merrill Lynch International and head of the firm’s Latin America business, said the investment grade underlined how the Brazilian economy had successfully diversified. “This [upgrade] mitigates risks for the country and creates a platform for bringing in further [foreign direct investment]”.

He argues the upgrade also reflects the emergence of São Paulo as Latin America’s financial hub, the low level of credit exposure enjoyed by Brazilian banks and the strength of small and medium-sized businesses in the country.

Brazil has made steady economic progress following a history of hyper-inflation that ended in 1994. When Luiz Inácio Lula da Silva, the socialist president, was elected in 2002, the debt and currency markets swooned. But fears of an economic disaster have been discounted by better fiscal management, aggressive monetary policy and independence for Henrique Meirelles, central bank governor

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