Brazil's Quest to Make the Grade
Bamrud, Joachim, Global Finance
Brazil is gradually improving its sovereign debt credit rating. When and how will it reach investment grade?
Gustavo Franco, a well-respected former president of Brazil's central bank who now works as executive director of Rio Bravo Asset Management, has no doubts as to the benefits of Brazil's achieving investment grade by the international credit rating bureaus. "[An upgrade] would result in a major boost for capital markets and, more importantly, a major multiplication of asset values in Brazil," he says. "It will bring a sustained and significant decrease in the cost of capital in Brazil, and, with that, the denominator for all valuations of assets in Brazil will be reduced and consequently values will increase-by very significant multiples."
So much for the benefits. The question remains whether-and when-Brazil might achieve investment grade. "We're not expecting anything quickly," says Lisa Schineller, the primary credit analyst at Standard & Poor's. In order for Brazil to reach investment grade, the country must first reduce its debt, interest and tax rates, reform social security further and reduce the rigidity of government expenditures, she says.
Although it has reduced its debt significantly in recent years, Brazil still has a net debt ratio of 47% of GDP, which is considerably higher than its peers, according to Standard & Poor's. By comparison, Mexico has a net debt ratio of 31% of GDP. Ratings agency Moody's explains why the debt ratio is so crucial for improving Brazil's rating. "A positive credit outlook contemplates that favorable trends observed to date will be preserved leading to further reductions in Brazil's overall debt burden over time," the agency said in its latest credit opinion on Brazil, released in June. …