Aug. 31 (Bloomberg) -- Brazil had its credit rating raised one level by Moody's Investors Service after the government paid down about $30 billion of foreign debt ahead of schedule.

Moody's raised the government's foreign- and local-currency bond ratings to Ba2, two levels below investment grade and in line with countries such as Colombia and Guatemala, from Ba3. The increase leaves Moody's rating in line with Standard & Poor's.

Brazil, the biggest debtor among developing nations, has taken advantage of a surge in dollar inflows from rising commodity exports to pare its external liabilities, making its finances less vulnerable to declines in the currency. After paying off about $15 billion to the International Monetary Fund at the end of last year, Brazil has repurchased about $15 billion of dollar-denominated bonds this year.

``It's a confirmation of a positive trend,'' said Regis Abreu, who helps manage 1.1 billion reais of assets at Mercatto Gesta de Recursos in Rio de Janeiro. ``It's definitely good news.''

Brazil's benchmark dollar-denominated bond due in 2040 extended gains after Moody's announced the rating increase. The bond's yield to the 2015 call date fell to 6.44 percent at 2:11 p.m. in New York, according to JPMorgan Chase & Co. The bond's yield to maturity dropped to 8.29 percent from 8.33 percent yesterday. The price, which moves inversely to the yield, rose 0.55 cent to 130.65 cents on the dollar.

Exports

Moody's had signaled it was considering raising Brazil's rating. On Aug. 1, Moody's put the rating on review for a possible increase. Moody's last raised Brazil's rating on Oct. 12.

Moody's said in a statement today that the decline in the country's foreign debt has ``led to a substantial reduction in credit vulnerabilities derived from the financial impact of exchange rate fluctuations.''

President Luiz Inacio Lula da Silva has sought to reduce the country's dependence on foreign financing. The public sector's consolidated foreign debt fell to $74.8 billion at the end of July from $119.8 billion at the end of 2003, according to the central bank.

Growing exports will maintain dollar flows into the country and help Brazil make repayments on foreign debt, Moody's said.

``The presence of a diversified export structure should allow Brazil to weather dips in commodity prices or a deceleration in world economic growth with more ease,'' Moody's said.

`Welcome News'

Brazilian exports rose to a record $13.6 billion in July from $11.1 billion a year earlier. During Lula's first three years in office, annual exports almost doubled to $118.3 billion in 2005 from $60.4 billion in 2002.

The rating increase will help Brazilian companies cut borrowing costs in international markets, Fabio Barbosa, chief financial officer of Cia. Vale do Rio Doce, the world's biggest iron-ore maker and Brazil's biggest exporter.

``It contributes to all of Brazil and I include Vale in that,'' Barbosa told reporters in Sao Paulo. ``It helps us a lot and is very welcome news for the country.''

Moody's also said it's concerned about rising government spending. It said the government will have to ease that spending to achieve further rating increases.

The spending pickup is ``inconsistent with the government's declared intention to assure fiscal sustainability over time,'' Moody's said in the statement.

To contact the reporter on this story: Carlos Caminada in Sao Paulo at at ccaminada1@bloomberg.net

Last Updated: August 31, 2006 15:04 EDT