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Can Brazil Qualify for the Investment Grade League?

Can Brazil Qualify for the Investment Grade League?. Shelly Shetty Senior Director. Agenda. Brazil’s Macro Picture. Brazil’s Credit Dynamics. Brazil versus India: Comparing Two of the BRICs. Agenda. Brazil’s Macro Picture. Brazil’s Credit Dynamics.

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Can Brazil Qualify for the Investment Grade League?

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  1. Can Brazil Qualify for the Investment Grade League? Shelly ShettySenior Director

  2. Agenda Brazil’s Macro Picture Brazil’s Credit Dynamics Brazil versus India: Comparing Two of the BRICs

  3. Agenda Brazil’s Macro Picture Brazil’s Credit Dynamics Brazil versus India: Comparing Two of the BRICs

  4. Brazil in a Snapshot Source: Fitch Ratings.

  5. Brazil’s likely to be more resilient to external turmoil External Financing Needs (USD Bn) • Ample international liquidity • Lower external financing needs • Liability management has reduced FX exposure of public debt • Central bank has the choice to let FX act as a shock absorber Source: Fitch Ratings.

  6. In 2007, Brazil exported USD$11bn to China, up from USD$2bn in 2001. Brazil’s more diversified export base provides cushion Brazil Exports to Major Markets 2001 2007 Note: Europe – EU & Eastern Europe countries, Latin America – Aladi & Mercosur Source: Ministerio do Desenvolvimento, Industria e Comercio Exterior.

  7. Agenda Brazil’s Macro Picture Brazil’s Credit Dynamics Brazil versus India: Comparing Two of the BRICs

  8. Brazil upgraded to ‘BB+’ in May 2007 • Rapid growth in international reserves has reduced Brazil’s external vulnerability • Solid improvement in external solvency ratios • Brazil has emerged as a net public sector external creditor • Continued macroeconomic and political stability Source: Fitch Ratings.

  9. What is slowing Brazil’s ascent to Investment Grade? • A heavy public debt burden • Unfavorable domestic debt profile • Weaker growth prospects compared with IG Sovereigns • Public debt dynamics not improving fast enough

  10. Still Unfavorable Domestic Debt Composition Average term of fed securities (number of months) Domestic Debt by Type Source: Bacen. Source: Fitch estimates using BCB data.

  11. Real Interest Rate – Selic*2003-2007 What will Fitch Ratings monitor in the coming months? • Brazil’s resilience in the unfavorable external environment • Central bank’s monetary and currency management • Signs of sustained investment and GDP growth • Improvements in external solvency and liquidity ratios • Fiscal performance • Reform progress *Note: Uses average nominal Selic and prospective inflation (IPCA index) for the next 12 months. Source: Bacen.

  12. Brazil Peru BBB Median Why Peru was upgraded first to IG Source: Fitch Ratings.

  13. But Brazil outshines Peru on Governance Indicators Source: World Bank and Fitch.

  14. Agenda Brazil’s Macro Picture Brazil’s Credit Dynamics Brazil versus India: Comparing Two of the BRICs

  15. Brazil and India: Similar in many respects GDP Growth by sectors • Large and closed economies • Brazil GDP (2007e): USD1.2 trn • India GDP: (2007e): USD 1.1 trn • Weak Public Finances • Deep and sophisticated domestic bond markets • Robust external liquidity and solvency ratios • Suffer from cumbersome coalition politics but India was assigned IG in August 2006. Source: National Authorities

  16. India’s growth story more sustainable Saving and Investment rates • Higher saving and investment levels • India’s manufacturing sector restructured since mid-90s • India has shifted towards knowledge economy • India is less commodity dependent but Brazil’s Per Capita Income is nearly 7 times that of India. Source: Fitch Ratings.

  17. General Government Debt (%GDP) India’s Debt Dynamics more favorable • GOI issues mainly long-term fixed rate bonds • GOI issues 10-year fixed rate bond at 8% • GOI domestic markets very captive in nature • GOI has no external bond debt Source: Fitch Ratings.

  18. India’s fiscal problems may have easier solutions Revenues (% GDP) Source: Fitch Ratings.

  19. External strengths: India’s international reserves more robust International Reserves/GDP (%) International Liquidity ratio (%) Source: Fitch Ratings.

  20. Brazil’s Relative Strengths • Brazil’s financial markets have been repeatedly tested • Brazil’s has consistently run primary surpluses • Improvement in Brazil’s external solvency ratios more dramatic • Higher level of per capita income and greater political stability Source: Fitch Ratings.

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