Wednesday, May 16, 2007

One Notch Below Investment Grade: Brazil Credit Ratings Raised by S&P

Brazil's long-term foreign sovereign credit rating was just raised to BB+ from BB by Standard & Poor's, leaving the country one notch below investment grade. S&P also raised Brazil's long-term local currency credit rating by two notches to BBB from BB+. S&P also upgraded the country's short-term local currency sovereign credit rating to A-3 from B and affirmed its B short-term foreign currency rating. The outlook on the long-term ratings remains positive, S&P said in a statement.

According to Standard & Poor's credit analyst Lisa Schineller, the upgrades on both the local and foreign currency long-term ratings and maintenance of the positive outlook reflect the continued decline in Brazil’s fiscal and external vulnerabilities and the expectation that the administration of President Luiz Inacio Lula da Silva remains committed to further reducing these vulnerabilities during his second term in office. According to Schineller:

“The government's demonstrated commitment to pragmatic policy—operational independence of the central bank and fiscal policy calibrated to keep debt/GDP on a declining trend—is backed by broad-based support across party lines"

Given the excellent balance-of-payments performance, S&P forecasts that Brazil's
external indebtedness (net of liquid assets) is to drop to 28% of current account in 2007 and 26% in 2008, from 48% in 2006. Brazil's net general government debt and interest burdens, projected at 43% of GDP and 16% of revenue in 2007, respectively, are still high, but both have declined 20 percentage points since 2002.

The outlook on the long-term ratings remains positive and according to Schineller:

``Proactive debt management has reduced Brazil's exposure to interest- and exchange-rate fluctuations'

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