Sooner than expected, and in the wake of Peru’s sovereign rating upgrade, Brazil finally got what it wanted last month – investment-grade status. Persistent lobbying by the government and perpetual optimism from the bankers seems to have had the appropriate effect. But not long after corks were popped to celebrate, the champagne had begun to go flat. Sceptics doubt whether this new status has been earned.
The top issues on Brazil’s economic agenda are tax reform, currency appreciation and inflation. Energy shortages and access to credit are next on the list. As foreign direct investment continues to flow in at record levels, and the dollar continues to weaken, so the real continues to appreciate. By mid-May, following Brazil’s upgrade, the real had reached a new high against the dollar of R$1.64/$ – a move that clearly shows that the new 1.5% tax measures, which the president placed on all currency trades in March, in order to make the real more competitive, have been less than effective.
In terms of fiscal reform, the worried analysts are succinct – this upgrade masks the underlying tax system problems, they say. Brazilians have a tax burden that is comparable to that of the average EU taxpayer – 45% of GDP. However, in contrast to many EU citizens, who have access to good free schooling, healthcare and infrastructure, Brazilians suffer from social development that lags well behind many nations.
But the final issue that really concerns some analysts is the deteriorating current account deficit. At the end of the first quarter of 2008, Brazil posted a shortfall of $10.8 billion, compared with a surplus of $7.5 billion at the same point in 2007. Some analysts predict a $18 billion deficit by the end of 2008; others forecast up to $30 billion. The difference in views highlights how much uncertainty there is over some aspects of Brazil’s economy, such as the extent to which the real will continue to appreciate, the impact of the credit crunch and so on.
S&P’s decision, which Fitch followed a few weeks later, reaped one immediate benefit for Brazil. Only days after the upgrade, Brazil tapped the international debt markets and set a new floor for emerging market transactions with a $525 million reopening.
The 2017 deal achieved the smallest new issue concessions by an emerging market credit this year with three to five basis points against the 9bp to 50bp range issuers have been paying. It achieved the tightest ever pricing for Brazil, with a yield of 5.3%. The transaction took just four hours to turn around – the fastest this year. The order book reached $4 billion soon after its opening.
Brazil is now the benchmark for the emerging markets borrowers after pricing the bond at 140bp over treasuries. The transaction, for which Deutsche Bank and HSBC acted as lead managers, outperformed some triple-A borrowers, such as Berkshire Hathaway.
