Brazil reaches Investment Grade

Paulo Henrique Rage*

Adler Martins**

Standar & Poor’s, one of the most influent American credit rating companies, has upgraded Brazil to an Investment-Grade credit rating, last Wednesday, April 30th. The new rating, which moved to BBB- from a previous BB+, implies that the country can be regarded as a safe and reliable market for financial investments. The new position also means that Brazil has balanced its internal finances, offering minimal chances of default.

The main reasons that lead to the Investment-Grade by S&P were the reduction of the budget deficit, the better perspectives of growth and to the reduction of the external debt. The Brazilian Central Bank has recently announced that Brazilian internal reserves, about 200 billion dollars, far surpassed the total debts of both public and private sector. The fact that Brazil is now a net creditor nation has inspired great confidence among investors.

Apart from the reasons above, Brazilian relative decoupling from the international market crisis has also been decisive to the granting of the new position. The current sub-prime crisis in the US, for instance, has had no major reflexes in the Brazilian economy so far, signing that the country may now stand against international economic instabilities. GDP’s growth in 2007 has been 5,4%, and the expectations of another 5% positive result in 2008 shows the solidity and strength of Brazilian economy, that is now headed to a path of sustainable growth through the next years.

Even before the country achieved the Investment-Grade rating, Foreign Direct Investments were reaching historical levels, up to US$ 34,6 billions in 2007. The stock market indexes have been in constant high, and the announcement has brought an all time record of 70 thousand points. Presumably, the new rating will cause a soar in local portfolio investments, including Brazilian companies’ stocks and public bonds. The market’s expectation is that Brazil highly increases its reception of Foreign Investments of all kinds.

It is remarkable that, in the Last years, Brazil has taken large steps in promoting foreign investments, especially in to stock market regulations. The Brazilian Stock Exchange Agency (CVM) has published regulations that succeeded in stimulating investments, notably among foreigners, who are attracted by favorable rules on profits repatriation, tax benefits (some investments may have 0% income taxation) and easy capital registration. In spite of Brazilian complex legal system, the stock market regulation is pretty clear and in line with modern international standards.

In the world economic scenario, the Investment-Grade rating has put Brazil at the same level of the other BRIC emerging countries, creating one more venue for the international investment funds to think about. Many of those funds, in fact, adopt the policy of investing only in Investment-Graded countries. So, in practical terms, the investment levels are expected to grow sharply with the entrance of the big players. To consolidate the new position, Brazil waits for another agency to grant it the same rating, what should eliminate any restriction from international investors. The foresight is encouraging, though. The respected credit-rating giant Moody’s has already signalized its intention to confirm the Investment-grade rating, which brings optimism to Brazilians.

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*Paulo Henrique Rage is lawyer, member of the Youth Leadership Council – Minas Gerais State, manager of Institutional Relations Department of Manucci Law Firm.

**Adler Martins is lawyer, specialized in international law, MBA by Fundação Getúlio Vargas – Brazil, manager of the International Law Department of Manucci Law Firm.

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