Brazil Trades A-Rated as Growth Makes Debt Safer Than Bahrain
Brazil’s credit rating, raised to investment grade two years ago, is poised to increase as the economy grows at the fastest pace since 2007, trading in credit- default swaps shows.
The cost to protect Brazil bonds, ranked BBB- by Standard & Poor’s, from default for five years fell seven basis points this month to 123 basis points, or 1.23 percentage points, according to data compiled by CMA DataVision. In Europe, where Greece’s spreading debt crisis led to downgrades this week, swaps on Portugal almost doubled this month to 2.9 points, even though its debt is rated A-, three levels higher than Brazil.
“If you look at the European economies, they’re clearly credits in decline and this is a credit on the rise,” Sebastian Briozzo, an S&P analyst, said in a phone interview from Boston.
Investors are growing more bullish as President Luiz Inacio Lula da Silva’s stimulus measures pushed quarter-over-quarter growth to 2 percent in the October-to-December period, Brazil’s fastest since a 2.4 percent expansion in the final quarter of 2007, according to government data. Growth will quicken to 6 percent this year, the second-fastest pace in two decades, according to a central bank survey of analysts.
Brazil’s credit-default swaps are less expensive than Bahrain, which is rated A, or four levels higher, as well as South Africa, two steps higher, and Russia, one level. Brazilian swaps point to a ratings increase of as many as two levels, according to Donato Guarino, an analyst with Barclays Plc in New York.
At 1.23 points, it costs $123,000 to protect $10 million of Brazilian debt against default for five years. That compares with a cost of $432,000 on March 2, 2009, when the global credit crisis eroded demand for emerging-market assets.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
The swap prices show traders expect Brazil to be upgraded “in the near future,” said Jim Craige, who helps manage $12 billion of emerging-market debt at Stone Harbor Investment Partners in New York. “It’s a very good fundamental story.”
The extra yield investors demand to own Brazilian dollar bonds instead of U.S. Treasuries narrowed two basis points to 1.88 percentage points at 3:51 p.m. in New York, according to JPMorgan Chase & Co. That gap is down from 3.55 percentage points a year ago. The average spread for emerging-market dollar debt shrank two basis points to 2.58 points. A basis point is 0.01 percentage point.
The real strengthened 1.1 percent this week after central bank President Henrique Meirelles raised the benchmark interest rate to 9.5 percent from a record-low 8.75 percent on April 28 to stem inflation as the expansion accelerates. The rate increase was Brazil’s first since 2008 and the first in Latin America since the region emerged from the global recession.
The real has gained 9 percent in the past three months, the best performance among emerging-market currencies tracked by Bloomberg. Brazil’s Treasury may double dollar purchases in the currency market, Treasury Secretary Arno Augustin told reporters in Brasilia yesterday.
The nation’s foreign reserves have climbed 26 percent to a record $247 billion over the past two years as the central bank bought dollars to slow the real’s rally.
The yield on the overnight interest-rate futures contract due in January climbed 11 basis points to 11.11 percent, the highest level since February 2009.
Brazil’s credit-default swaps have tumbled by more than half in the past year as the economy’s recovery bolstered tax revenue, helping trim the budget gap to 3.2 percent of gross domestic product from 4.6 percent in October. That compares with projected deficits of 9.4 percent in the U.S., 6.2 percent in South Africa and about 6 percent in Russia.
S&P’s Briozzo said Brazil is a “strong” credit within its rating group. For the country to keep wining rating increases, it has to continue displaying “macroeconomic soundness” and the government needs to pare back stimulus measures implemented amid the crisis, he said.
Rating upgrades are constrained by Lula’s failure to push tax reform legislation through congress and a decline in public investment, said Henry Stipp, an emerging-market fund manager at Threadneedle Asset Management in London, which has $98 billion of assets under management.
“There’s a lack of structural reforms,” Stipp said. “There’s a clear deterioration.”
He said Brazil’s swaps are “fairly priced” with its BBB- rating because Russia’s swaps market is distorted by “technical issues.” Russian five-year credit default swaps trade at 1.45 percentage points.
S&P’s upgrade of Brazil to investment grade in April 2008 was followed by Fitch Ratings a month later and Moody’s Investors Service last September.
When asked for comment on Brazil, Moody’s sent a March 31 report that said the positive outlook on the rating suggests “the chances that the country will stay on a multiyear path of improved creditworthiness are reasonably high.”
Fitch analyst Shelly Shetty wasn’t available to comment.
Brazil swap costs are higher than their fair value because buyers of the country’s corporate bonds have purchased government default swaps to hedge their risk, said Barclays’s Guarino. Braskem SA, Latin America’s biggest petrochemical producer, plans to sell $400 million of bonds today, bringing Brazilian corporate debt issuance in overseas markets this year to $15 billion, according to data compiled by Bloomberg.
“If the technical effects get out of the way, Brazil CDS should be tighter,” Guarino said. “Brazil’s credit outlook remains intact. The growth is still strong.”