Brazil’s Credit Rating Upgraded As It Becomes ‘The Country Of Now’
Brazil’s stellar economic performance, making it one of the most dynamic BRIC-emerging market (EM) economies, has led to a credit upgrade by Fitch, which raised its issuer default rating for Brazil one notch to BBB. The credit rating agency cited a smooth power handoff from Lula to Dilma Rousseff, sustainable potential growth rate, and an improving medium-term fiscal position, adding to the country’s capacity to absorb external shocks, as reasons for the recent upgrade, while it revised its rating outlook to stable from positive.
Recent ratings news had been dominated by deteriorating finances in Europe, as Portugal’s political crisis has sparked fears of contagion among the PIIGS and fueled the possibility of a further EU-IMF bailout. Monday, though, saw a Fitch recognizing the strength of the Brazilian economy and deciding to up its credit rating by one notch to BBB. The real strengthened against the dollar on Monday, with the USD/BRL exchange falling 0.52% to 1.6152 by 1:23 PM in New York. (Read Portugal’s Sovereigns Downgraded, Spanish Banks Guillotined).
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Fitch’s Latin American sovereign ratings team noted that they had upgraded their estimate for the potential growth rate of the Brazilian economy to 4% to 5%; Brazil’s economy grew at an impressive 7.5% in 2010, forcing it to reckon with the possibility of overheating and massive inflation. Still, with a diverse economy and robust demand dynamics, Brazil is poised to continue growing and exert its international influence. Already Petrobras is one of the largest players in the oil game, especially in offshore drilling, and Vale is among the top three largest global miners by market cap; AmBev, Latin America’s largest brewery, forms a large part of international powerhouse Anheuser-Busch InBev, which’s organization is dominated by Brazilian executives. (Read Brazil’s Funding Needs Provide Private Equity Opportunity).
Dilma Rousseff, hand-picked successor of the massively popular former president Lula Da Silva, has inherited a growing economy plagued by massive fiscal spending and massive capital inflows (Dilma is ranked #16 in Forbes’ World’s Most Powerful People list). While currency appreciation was cutting into exporters’ capacity, mounting inflation was eating into real wages. Dilma has begun a series of macro prudential measures to control inflation, including “spending cuts in 2011 and a modest increase in the minimum wage as well as a steady reduction in the Treasury’s loans to the BNDES (a national development bank)” which according to Fitch are “supportive of a gradual improvement in the overall fiscal stance.” (Read Brazil’s Currency Pickle: Mounting Inflation And Real Appreciation).
Brazil, Latin America’s largest economy, has received massive capital inflows, allowing the country to build up a strong external liquidity position which has increased its capacity for “shock-absorption.” Having built up international reserves of about $300 billion, Fitch notes that Brazil’s capacity to deal with current account deficits has increased. (Read March Portfolio Flows For BRIC Markets).
Another key consideration in the upgrade was the active role played by the Brazilian Treasury in managing the nation’s massive domestic debt, as well as having secured “considerable resources for external debt amortizations in the coming years, which reduces the country’s vulnerability to volatility in international capital markets.”
While the risk of a hard landing could result from “sharp rise in public debt burden or the crystallization of significant contingent liabilities from the financial sector,” Brazil appears to be steadily marching on its path to shed the “country of the future” title to become the “country of now.”
(Read Petrobras To Focus On Brazilian Production To Outstrip Exxon Atop Oil Markets, CFO Says).
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