Ratings upgrade puts Brazil at top table in investors

Brazil, for years dogged by its boom-and-bust economy, has finally won a place on the top table in the eyes of the world’s investors.

For the first time this week it was awarded investment grade status, which means Brazil is now con-sidered a safe investment destination that is unlikely to default. This should both accelerate and increase investment into the country.

The decision by Standard & Poor’s, the ratings agency, to give the country a triple B minus credit rating, the lowest on the investment grade rung, was considered only a matter of time as inflation has fallen and the government has consistently delivered primary budget surpluses before debt repayments.

Brazil is still a long way from the top-notch triple A ratings of the developed economies, such as the US, Britain and Germany, but its rise out of junk or speculative grade is important as it allows some of the biggest pension and insurance funds to invest in the country.
Many of these big institutions are not allowed to channel funds into countries rated below investment grade because of the dangers that these economies will default, losing their clients vast sums of money.

David Beers, the global head of ratings at Standard & Poor’s, said: “This should help Brazil as it could lead to an acceleration of investment there.

“The key reason for our decision to upgrade the country was its position as a net external creditor. The other thing that has continued to impress is the country’s long-standing fiscal primary budget surplus.”

Of the leading developed and emerging market countries, Brazil’s stock market has been the best performer this year as investors have taken heart from an economy that continues to grow at a healthy 5 per cent on the back of surging commodity prices, which have helped shelter it from the global credit crisis.

While the S&P 500, the US benchmark stock index, has fallen by about 6 per cent this year, the Brazilian Bovespa index has risen by about 14 per cent to record levels.

Henry Hall, at Merrill Lynch, said: “The country has been riding on the back of the commodity boom. It has the raw materials, such as iron ore, nickel, copper as well as large agricultural exports, such as soyabeans, which means it is a net exporter.”

Brazil’s banks have also so far weathered the global -crisis as they have not been exposed to the subprime and securitisation markets, which have wiped billions of dollars off the balance sheets of big western banks.

But it is not just the western economies that have been left in Brazil’s wake. It has also outperformed its -fellow BRIC countries - Russia, India and China, which already have investment grade status.

The Shanghai SE Composite index, for example, has fallen about 27 per cent this year as investors have worried that the market has risen too fast.

Unlike Brazil, China is a net importer of raw materials, which have forced up production costs and raised further doubts over its ability to sustain its powerful growth.

However, although the biggest South American economy is unlikely to return to the boom-bust days of the the 1990s, there are concerns that it might be entering a period of rising interest rates, which tend to undermine growth, as inflationary pressures build up.

Domestic demand has risen strongly over the
past two years, fuelled by lower employment, higher wages and cheaper credit.
Public debt is still high compared with other emerging market economies, while an appreciating currency, which has risen about 7 per cent against the dollar this year, could put pressure on the balance of payments.

However, in spite of some negative signs, most bankers and investors remain -optimistic. Nick Chamie, head of emerging markets research at RBC Capital Markets, said: “This rating upgrade is well deserved. Brazil has put its boom-bust problems of the past behind it and emerged as a well-run emerging nation. This investment grade rating should help the economy to continue on its upward path.”

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