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Brazil’s Lula Loves Investment Grade – Whatever That Is

Lula laughs Brazil’s President Luiz Inácio Lula da Silva is having the time of his life at the moment. Barely a day goes by when he does not pop up in some part of the country like a latter-day Harold MacMillan telling everyone that they have never had it so good.

He gives the same old speech – no more hunger, booming economy, falling unemployment, new jobs – occasionally throwing an extra ingredient in – damning the “elite” which can’t stand the idea of a son of the soil like him being President or highlighting the virtues of his right-hand woman, Dilma Rousseff, the “mother” of the Accelerated Growth program which is apparently going to resolve all the outstanding problems facing Brazil.

Lula recently got a new arrow to add to his bow when the rating agency Standard & Poor’s announced that it was granting Brazil “investment grade” status i.e. that it is in a good position to pay off its debt. Lula said the news showed that Brazil was a “serious” country.

It would be interesting to know how Lula defines being “serious” since he subsequently announced that he had not known what investment grade meant and thought it was a kind of ice cream. I assure you reader I am not making this up.

In a sense investment grade is like a sweet being granted to a good little boy who has done his homework. Lula may not have done any homework himself but his first finance minister, Antonio Palocci, and the Central Bank have done it on his behalf. By appointing a competent Central Bank chairman, Henrique Meirelles, and letting him run the monetary policy in his own way to meet the government’s inflation target, Lula has done the country great service.

By refusing to listen to politicians and businessmen complaining about high interest rates but offering no realistic alternatives, he has overseen an economic transformation. There have been other factors such as the growing world economy and China’s insatiable demand for Brazilian goods, as I have mentioned on previous occasions, but overall Lula has proved to be a safe pair of hands.

The fact that the S&P announcement came as the American economy is still struggling with the effects of the subprime mortgage crisis and US and European banks are reporting massive losses shows how far Brazil has come from those dark days when it was engulfed by crises in Russia, Asia and Argentina.

In its statement issued on the eve of the May Day holiday, S&P said: “On April 30, 2008, Standard & Poor’s Ratings Services raised its long-term foreign currency sovereign credit rating on the Federative Republic of Brazil to ‘BBB-‘ from ‘BB+’, and its long-term local currency sovereign credit to ‘BBB+’ from ‘BBB’.

“Brazil is the 14th sovereign whose foreign currency debt has been raised to investment grade. 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.”

The news itself was not unexpected but the timing caught everyone on the hop. However, this was a pleasant surprise for a change and the stock market rose by 6% in the remaining hours of trading that day while the real appreciated by 2.5% over the dollar. The Bovespa has continued to power ahead to record levels and at the time of writing has gained 9% in the year.

Compare this with the dismal performances on an annual basis of the Dow Jones (-3.9%), Nasdaq (-7.8%), London (-13.1%), Frankfurt (-13.1), Paris (-10.3) and Tokyo (-12.2%) indices and you can understand why foreign investors are rushing to Brazil. Investment grade status will increase this flow as many funds are only allowed to invest in countries with investment grade. 

The news was warmly received in Brazil except by the PSDB party of former president Fernando Henrique Cardoso which felt that it was not getting its share of the praise. The Estado de S. Paulo newspaper, which at times reads like the PSDB newsletter, was full of quotes, articles and indignant letters demanding recognition for Cardoso’s role.

Since Cardoso’s two periods of office were marked by continuous financial crises, including the drastic devaluation of the real in 1999, Lula was able to claim all the glory for himself. All is fair in love, war and politics, especially the Brazilian variety, and Cardoso can defend himself.

Obviously investment grade is not going to solve Brazil’s many problems. Lula himself wondered aloud why a country with colossal financial problems like the US still had investment grade. Perhaps this kind of gloating is a bit unkind but one can understand how Brazilians feel now that the boot is on the other foot.
 
It would be good to think that this was just a first step and that Brazil will make further efforts to move up the scale and find itself among the “A” instead of the “B” teams. Unfortunately, I do not see this happening under the Lula government which is still expanding government spending (using the record tax collection from the booming economy), doing little if anything to push through essential reforms to overhaul the tax and labor laws, and indifferent to the corruption and scandals which are a daily part of political life.

However, let’s not spoil the party and join E.M. Foster in toasting “Two Cheers for Democracy”.

John Fitzpatrick is a Scottish writer and consultant with long experience of Brazil. He is based in São Paulo and runs his own company Celtic Comunicações. This article originally appeared on his site www.brazilpoliticalcomment.com.br. He can be contacted at jf@celt.com.br.

© John Fitzpatrick 2008

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