Widest Yield Gap With Russia Since May Signals Rating Boost: Brazil Credit
Brazilian benchmark bond yields fell to a six-month low relative to Russian debt, signaling investors expect the South American nation may have its credit rating raised.
Brazil’s dollar bonds due in 2019 yielded 132 basis points less last week than similar-maturity Russian debt that is rated one level higher, the biggest gap since May, according to data compiled by Bloomberg. The difference grew as yields on Russia’s notes rose faster than Brazil’s in the past month.
Analysts surveyed by the central bank predict Latin America’s biggest economy will expand 7.5 percent this year, the fastest pace in more than two decades and almost twice as fast as the rate forecast by Russia’s Economy Ministry, while inflation will pick up at a slower pace. Central bank President Henrique Meirelles said in a speech to businessmen in Sao Paulo yesterday that Brazil’s BBB- rating is also low compared with Italy, Portugal and Ireland, all graded at least three steps higher, and is likely to be increased.
“Brazil has been trading like a BBB+ credit for quite a while now,” David Spegel, head of emerging-market debt strategy at ING Groep NV in New York, said in a telephone interview. “The credit agencies have been so behind the curve that the market looks at it as somehow irrelevant.”
The yield on Brazil’s 5.875 percent bonds due in 2019 tumbled 118 basis points, or 1.18 percentage point, since the end of April to 3.59 percent, according to Bloomberg data. Yields on Russia’s 5 percent bond maturing in 2020 declined 53 basis points during the same period. In the past month, yields on Russia’s notes rose 57 while Brazil’s increased 42.
Brazil, which received its first investment-grade rating in 2008, is ranked one level below Russia’s BBB at Standard & Poor’s and two levels below its Baa1 at Moody’s Investors Service.
The cost of protecting Brazilian debt against non-payment with credit-default swaps is 107 basis points, compared with 150 for Russian debt, CMA prices show. The contracts 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.
“It reflects the fundamental divergences,” Win Thin, the global head of emerging-markets strategy at Brown Brothers Harriman & Co. in New York, said in a telephone interview. “While Russia is rated higher than Brazil, these ratings have lost all meaning. Brazil is safer. Brazil has more credibility.”
A ratings increase for Brazil depends on how President- elect Dilma Rousseff’s government withdraws stimulus measures implemented during the global financial crisis, Regina Nunes, the representative for S&P in the country, said at an event hosted by the ratings company in Sao Paulo yesterday.
“Brazil is going to have a new government who is going to set its priorities,” Nunes said. “How are they going to withdraw countercyclical stimulus that caused more expenses?”
President Luiz Inacio Lula da Silva increased spending 27 percent in the first nine months of the year.
While Rousseff’s government will need to take steps to curb spending growth, the country’s economic expansion and high foreign reserves may make it “a candidate for an improving rating,” Mauro Leos, an analyst at Moody’s in New York, said in a telephone interview.
“Because we saw spending increase significantly this year, so one of the questions is if this administration will reduce the rate of spending,” he said. “We have a positive bias on Brazil. We will take a closer look at the rating in the second quarter of next year.”
The government’s failure to curb subsidized lending by its development bank will prompt ratings companies to withhold increases to Brazil’s ranking, said Oscar Sanchez, a senior international economist at Scotia Capital in Toronto.
BNDES, as the bank is known, granted 171 billion reais of new loans in the 12 months through October, a 33 percent jump over the same year-ago period, according to the bank’s website. BNDES more than doubled lending to Brazilian companies to 137.4 billion reais last year, exceeding the $72.2 billion lent globally by the World Bank in the fiscal year ended in June.
Subsidized lending helped push annual inflation to a five- month high of 5.2 percent in October.
“Credit is picking up on the back of government financing and that’s not healthy and that’s not sustainable,” Sanchez said in a telephone interview. “I would not expect a rating upgrade in Brazil.”
The extra yield investors demand to hold Brazilian dollar bonds instead of U.S. Treasuries narrowed 9 basis points to 167 at 6:21 a.m. New York time, according to JPMorgan Chase Co.
The yield on Brazil’s overnight interest-rate futures contract due in January 2012 rose 2 basis points to 12.06 percent.
The real rose 0.4 percent to 1.6688 per dollar.
Meirelles said Brazil’s rating is lower than countries with more debt. Brazil’s debt is equal to about 40 percent of its gross domestic product, compared with 66 percent for Ireland and 76 percent for Portugal last year.
Borrowing costs for European nations from Portugal to Ireland soared this year on concern they may have to restructure their debts. Ireland agreed to a 67 billion-euro ($89.6 billion) aid package from the European Union and the International Monetary Fund, seven months after Greece received a 110 billion- euro rescue. Yields on benchmark Irish debt jumped 305 basis points to 7.88 percent while Portugal’s benchmark borrowing costs climbed 166 to 5.70 percent.
“Looking at some European countries, Brazil’s rating seems a bit low,” Meirelles said. “But it’s only a question of time before this changes.”
Brazil’s budget deficit will shrink to 2.5 percent of gross domestic product this year from 3.3 percent last year, according to a central bank survey of about 100 economists. The Russian government expects its budget to remain in deficit through 2014, with the shortfall narrowing to 4.6 percent of GDP in 2010 from 5.9 percent last year.
The deficit is the main “sore spot” of Russia’s macroeconomic outlook, Sergei Vasilyev, a deputy chairman of Russian state development bank VEB, said at a Nov. 17 conference in Moscow.
“The market is getting more comfortable on where Brazil is than Russia,” said Kathy Jones, an emerging-markets bond strategist at Morgan Stanley Smith Barney, which manages $1.6 trillion. “There’s more optimism about Brazil.”
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