April 30, 2008 / 7:39 PM / 11 years ago

UPDATE 1-S&P upgrades Brazil to investment grade "BBB-"

(Adds background, analyst quotes, prices, byline)

By Daniel Bases

NEW YORK, April 30 (Reuters) - Standard & Poor’s lifted Brazil’s sovereign credit rating one notch to “BBB-“ on Wednesday, giving it coveted investment grade status, citing a maturing of institutions and improved growth prospects.

“The upgrades reflect the maturation of Brazil’s institutions and policy framework, as evidenced by the easing of fiscal and external debt burdens and improved trend growth prospects,” Lisa Schineller, S&P sovereign analyst said in a statement.

“While net general government debt remains higher than that in many “BBB” peers, a fairly predictable track record of pragmatic fiscal and debt management policies mitigates this risk,” she said.

Fitch rates Brazil rate “BB+” while Moody’s Investors Service rates it “Ba1”, both one notch below investment grade.

Brazil’s benchmark 2040 sovereign Global bond BRAGLB40=RR rose in price on the news. The issue traded up 1.25 points in price to bid 135.875, yielding 5.049 percent.

“In terms of price action today we are seeing the pricing in of future buying by non-dedicated emerging market investors who will eventually include Brazil’s external or domestic debt in their portfolios once a second investment grade rating comes,” said Benito Berber, Latin America strategist at RBS in Stamford, Connecticut.

Brazil's currency, the real BRBYBRL=, jumped 2.46 percent in value to 1.66 per U.S. dollar.

“In the real, I think we are likely to see a more positive tone, but again, to the extent that the initial beneficiary is the external curve, local assets and the currency will benefit in a secondary way,” Berber added.

S&P’s Schineller said pragmatic macroeconomic policies strengthened the foundation for sustained real gross domestic product growth of 4 to 4.5 percent.

“Despite tighter global credit conditions, Brazil’s maturing growth outlook continues to attract foreign direct investment (FDI), diverse in terms of size and destination,” the statement said.

According to S&P FDI accumulated through April 2008 reached an estimated $12.4 billion, on track to match last year’s record of $34.6 billion.

“In a very material way Brazil showed since August that it could navigate this international turbulence quite well. It is deserved. It certainly has a credit quality and has improved tremendously over the last two, three years,” said Alberto Ramos, senior economist at Goldman Sachs in New York.

S&P however did highlight areas of weakness in Brazil’s credit structure.

“Fiscal policy and indicators are Brazil’s foremost credit weaknesses. Net general government debt stood at 47 percent of GDP (including 7 percent of GDP in central bank repurchase operations) at year-end 2007, higher than in similarly rated credits and above 20 percent of GDP for the “BBB” median.” S&P said.

Passing of tax or social security reform, which S&P does not expect within the rating horizon, would be a positive shock to confidence and contribute to stronger creditworthiness, the statement said. (Additional reporting by Walter Brandimarte and Manuela Badawy; Editing by James Dalgleish)

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