Emerging Markets : At Last! An Upgrade

After months of market talk indicating that a marked improvement in Brazilian fundamentals would lead to an upgrade in its sovereign ratings, Moodys took the first step and upped the countrys long-term foreign currency debt to B1 from B2 on September 9four notches away from a coveted investment grade. Ratings were cut in 2002 as a result of the countrys economic recession.

In its rationale for the upgrade, Moodys pointed to the administrations prudent fiscal management and a booming export sectorwhich will facilitate debt servicingas reasons for the reward. Although it says the rating remains constrained by vulnerability to sudden shifts in investor confidence, a tightening of Brazilian debt spreads over comparable US treasury bonds after the upgrade was a clear sign that, at least for the moment, confidence is rising.

The economy expanded by a higher-than-expected 5.7% year-on-year in second-quarter 2004, while household consumption also jumped by 5% year-on-year during the quarter. The positive data led analysts to increase their full-year consensus growth forecast to around 4.5% from a previous 4%, compared with last years 0.2% contraction.

During a Brazilian non-deal roadshow in September, central bank deputy governor Alexandre Schwartsman said the economy is better shielded from exchange rate risk now that the ratio of dollar-linked debt fell from 56% at end-2002 to near 30% in July, while the debt-to-GDP ratio also fell from 58.7% to 55.3% between January and July.

His positive outlook was echoed by IMF managing director Rodrigo Rato, who agrees that the country is more immune from external shocks and called the administrations policies courageous. Under the current IMF program, Brazil is committed to posting a budget surplus of 4.25% of GDP this year.

Santiago Fittipaldi