Brazil Swap Rates Decline on Credit Rating Concern; Real Weakens

Brazil swap rates fell on speculation that policy makers will limit borrowing cost increases to shore up growth and reduce the risk of cuts to the country’s credit ratings.

Swap rates on contracts due January 2015 fell one basis point, or 0.01 percentage point, to 10.58 percent at the close of trading in Sao Paulo. The real depreciated 0.9 percent to 2.3597 per dollar, extending its decline this year to 13 percent.

Policy makers may limit borrowing cost increases that could raise the government’s interest payments and discourage borrowing after rating companies cited deteriorating finances and slow growth when they cut their outlooks on Brazil this year, said Pedro Tuesta, a Latin America economist at 4Cast Ltd. Brazil’s total debt was 58.5 percent of gross domestic product in November, data released Dec. 27 showed, while a 29.7 billion-real primary surplus trailed the 32 billion-real median forecast of economists.

“Perhaps there is the expectation that with the government’s fiscal effort, the central bank will try to hold the hikes as much as possible,” Tuesta said in a phone interview from Washington.

Brazil’s gross debt is higher than the median 45 percent for its peers, Moody’s Investors Service said Oct. 2. Moody’s and Standard & Poor’s, which last lowered their ratings for the country in 2002, cited deteriorating finances when they cut their outlooks on the nation’s credit grade. Brazil is rated two levels above junk at BBB by S&P and an equivalent Baa2 by Moody’s.

Rate Increases

The central bank on Nov. 27 increased borrowing costs by 50 basis points for the fifth straight meeting, boosting the key rate to 10 percent. Consumer prices in the year through mid-December rose 5.85 percent. The central bank targets inflation of 4.5 percent plus or minus two percentage points.

The top five forecasters in a weekly central bank survey published today cut their year-end 2014 Selic forecast to 10.25 percent, from 10.63 percent the week before. The median estimate of about 100 economists was for 2013 GDP growth of 2.3 percent, down from 2.5 percent in a Nov. 29 survey.

The central bank said Dec. 18 that it will extend through the end of June a scaled-back version of its program to support the real with currency swaps and foreign exchange credit lines. The bank will offer as much as $200 million per day in currency swaps and dollar credit line auctions depending on market conditions, according to an e-mailed statement. The announcement came hours after the Federal Reserve said it would trim U.S. monetary stimulus that supported demand for emerging-market assets such as the real.

Currency Swaps

The program, which was announced in August and had been scheduled to end tomorrow, includes offers of four currency swap auctions per week for as much as $500 million and one auction per week of dollar credit lines for as much as $1 billion. The central bank said it sold $497 million in currency swaps today under the program.

The extended program “helps to mitigate, though not eliminate, currency volatility next year without fighting the underlying depreciating trend of the real,” according to an e-mailed note to clients today by Mauricio Molan, economist at Santander Brasil SA.

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