RPT-UPDATE 3-Brazil wins 2nd investment grade rating in a month

Thu May 29, 2008 8:35pm EDT
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By Todd Benson
SAO PAULO, May 29 (Reuters) - Brazil won its second investment-grade credit rating in a month on Thursday, paving the way for a surge in capital inflows and cementing its status as an up-and-coming economic power.
Fitch Ratings raised Brazil's sovereign credit rating one notch to "BBB-," praising the country's economic performance and its efforts to reduce its debt burden. It also hailed the government for taming once-rampant inflation, long a bogeyman haunting the Brazilian economy, Latin America's biggest.
The upgrade, which was widely rumored to be in the works for weeks, took place just one month after a similar move by Standard and Poor's, the first major credit ratings agency to grant Brazil an international stamp of approval after years of painful economic reforms.
The upgrades should also allow the Brazilian government to borrow money at lower interest rates. This month, the government seized on the earlier S&P upgrade and sold $525 million in dollar-denominated global bonds at lower borrowing costs.
"Brazil is now getting international recognition for its work over the past decade," said Paulo Skaf, president of the Sao Paulo state Federation of Industry, Brazil's most influential business lobby.
Brazil's currency, the real BRBY, jumped more than 1.0 percent to close at a nine-year high and interest-rate futures fell sharply following the upgrade. But the main stock index, which had rallied 3.0 percent on Wednesday in anticipation of the upgrade, fell almost 2.0 percent in line with slumping oil and mining shares.
Brazil, which along with Russia, India and China is one of the world's fastest growing emerging market economies, has made significant strides in recent years in cleaning up its public finances and in paving the way for sustained growth.
A farming and mining powerhouse, Brazil has prospered in large part thanks to booming global demand for key commodities like soybeans and iron ore. It also has one of the most dynamic capital markets in Latin America, which allows Brazilian companies to raise cash at home and has attracted a steady flow of foreign investment.
Brazil's long road to investment grade culminated under an unlikely leader, President Luiz Inacio Lula da Silva. Once a fiery union boss who sent shivers down the spines of investors, Lula has not strayed from the conservative economic policies of his predecessor and has overseen Brazil's biggest economic boom in decades.
DEBT BURDEN STILL A CONCERN
Moody's Investors Service is now the only major agency to rate Brazil's sovereign bonds below investment grade. After the S&P upgrade, Moody's said Brazil needed to reduce its debt burden further before joining the investment grade club.
Since the S&P upgrade last month, some analysts have voiced concern that the Brazilian government could become lackadaisical and return to the free-spending ways of the past -- a worry that officials have dismissed as unfounded.
Finance Minister Guido Mantega said it was "no coincidence" that the Fitch upgrade came a day after the government posted an overall budget surplus for April, highlighting its commitment to fiscal prudence.
Despite the upgrade, Fitch stressed that Brazil still could do more to improve its public finances. For starters, it could raise its fiscal surplus beyond the current target of 3.8 percent of gross domestic product.
"Clearly that would be a step in the right direction," Shelly Shetty, Fitch's main analyst for Brazil, told Reuters. "That would also help improve the policy mix between monetary policy and fiscal policy" to contain inflation, she added.
With investment grade status from two major ratings agencies already under its belt, Brazil looks poised to be included in the widely tracked Lehman Aggregate Bond Index, which will increase the pool of potential investors that can buy Brazilian securities.
"There are two positive aspects. One is simply the question of confirming the investment grade," said Vladimir Caramaschi, chief economist at Fator brokerage in Sao Paulo. "But there are also practical effects with more money entering the country."
Itau Securities, the brokerage arm of Brazil's second-biggest private sector bank, estimates the flood of capital from institutional investors and pension funds to Brazil may reach at least $120 billion because of the investment-grade ratings. (Additional reporting by Daniela Machado and Alberto Alerigi in Sao Paulo, Isabel Versiani in Brasilia and Walter Brandimarte in New York)