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Brazil Risk Falls to Record Low, But It’s Still Three Times Higher than Mexico’s or Russia’s

There are indices that reflect a country’s economic situation. One of the most popular, internationally, is the country risk premium, created in 1994 by the JP Morgan Bank, in the US, to guide clients as to the future of their investments. Wednesday, January 4, the Brazilian country risk premium fell to its lowest level ever: 301 points.

The country risk premium, which is used to measure the degree of uneasiness that exists in relation to 21 emerging countries, including Brazil, is based on a basket of titles negotiated in the major centers of the international financial market.

In the case of Brazil, the Brazilian foreign debt title known as the C-Bond is the one most used to calculate the index. The market interprets high country risk premiums as indicative of a significant likelihood that a country will not honor its commitments, such as foreign debt payments. Investors thus shy away from countries with high country risk premiums.

There are other factors, however, that can be used to size up an economy’s future, such as inflation controls, the fiscal surplus, the currency exchange system (in Brazil, it is a floating exchange at present), and the trade surplus.

In 2005, for example, Brazil achieved its best trade surplus ever. The difference between exports and imports amounted to US$ 44 billion, 33% more than in 2004.

While the Brazilian government is celebrating the drop in the country’s risk, Brazil is still far from equaling the levels of other emerging countries, such as Mexico, which ended the year with a country risk premium of around 122 points, or Russia, with 113 points.

The Brazilian government is still pursuing the goal of the country’s being recognized as "investment grade," a classification that indicates total confidence as far as investing in the economy.

At the end of 2005, the Brazilian government showed signs of being a reliable payer, when it paid off, ahead of time, all of its US$ 15.5 billion debt to the International Monetary Fund (IMF) and announced that in January it will liquidate its debt to the Paris Club, the group of countries that renegotiated the Brazilian debt in the decade of the 1980’s, when Brazil declared a debt moratorium.

The minister of Finance, Antonio Palocci, affirms that Brazil will eventually be reclassified. "We are moving in the direction of a country that can be considered investment grade. It is a continuous effort. It is not accomplished in just one throw of the dice.

"It will come in the coming years, to the extent to which we keep making microeconomic adjustments and improving our indicators. It represents the natural result of this process in which we are engaged."

Palocci insisted that all the indicators demonstrate the solidity of the Brazilian economy, which, in his view, "is prepared for domestic upheavals and getting set to deal with external ones as well."

Agência Brasil

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  • Show Comments (2)

  • conrad johnson

    where can I find a historical graph of this `Brazil Risk`?

  • Guest

    donald gerard jones
    In 2006 I intend to invest in Brazil equities. How can I reach the author to discuss country risk ratings source. djones thank you

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