Brazil's lower debt ratio brings advantages, risks

By Luciana Lopez - Analysis

SAO PAULO (Reuters) - Once marked by turbulence, Brazil's now-healthy finances may be both the envy of the rich world and a source of future troubles.

Latin America's largest economy has deflected the worst of the financial crisis that has left the major industrialized countries buried deeper in debt.

Yet Brazil's privileged fiscal position brings risks: a flood of foreign money that could overheat the economy and the potential for fiscal slippage during the 2010 elections.

Brazil's net public sector debt-to-GDP ratio rose to about 44 percent in August, up from about 36 percent at the end of 2008, according to the central bank.

That's smaller than International Monetary Fund estimates for most G7 economies in 2009: 58 percent in the United States, 62 percent in the United Kingdom and 104 percent in Japan.

That's partly because Brazil was not as hard-hit by the global crisis as those nations. Brazil's fiscal stimulus package cost only 1 percent of GDP, Finance Minister Guido Mantega said in September.

In contrast, the U.S. Congress approved a $787 billion stimulus package in February alone -- more than 5 percent of the world's largest economy.

Brazil's second-quarter return to growth, ahead of many developed economies, gave its politicians much to crow about.

President Luiz Inacio Lula da Silva boasted in September that Brazil was readier to deal with the global crisis than the developed world.

SURGING CAPITAL INFLOWS

Higher debt burdens mean more of a country's revenues must go to debt servicing. Steep debt also tends to drive credit costs higher as governments crowd public borrowers out of the marketplace.

Thus Brazil's lower ratio means the country will have more space in its budget to spend money not on repaying creditors but to invest in the country itself.

That fiscal advantage "has very strong implications for credit-worthiness," said Paul Biszko, an emerging markets strategist with RBC Capital Markets in Toronto.

Still, he noted the need for caution. "It's not a stand-alone factor," he said. "We do have some medium-term concerns about Brazil's fiscal dynamics," including the growing government, social security payments and budget inflexibility.

But it also means that Brazil will have to adjust to its new global status, with all the attendant changes, such as heavy inflows as investors seek higher yields than those available in still-tepid developed economies.