Brazil’s 70% of GDP Debt Puts It Far from Investment Grade

Brazil is still far from the much coveted Investment Grade in spite of financial market speculations according to the risk rating agency Fitch Ratings, which estimates that the BBB qualification will have to wait "two to three" years.

"Since 2003, Brazil's external indicators have improved substantially. Even so Brazil's advance to Investment Grade rating is hampered by a mediocre growth rate and the high indebtedness of the Brazilian government," said Fitch in a report titled "Can Latinamerica BB sovereign bonds reach Grade Investment?"

Fitch argues that Brazil needs to considerable increase its fiscal ratios in the coming years if it wishes to approach the levels of countries with Investment Grade. Brazil's global debt stands at 70% of GDP, which is double the average of countries rated BBB.

"With a fiscal deficit of 3% of GDP and growth in the range of 3 to 4%, even the government's indebtedness is not heading for a significant reduction," adds the report.

The risk agency also questions Brazil's low investment level (21% of GDP) and the below average efficiency.

To overcome these shortcomings, according to Fitch, Brazil must address economic reforms which face another obstacle since the majority of them need constitutional modifications demanding a majority of 60% in both Houses of Congress. And reelected president Lula da Silva does not have a sufficient majority in any of the two.

Last but not least, statistics don't favor Brazil reaching Investment Grade in 2007.

Between 2000 and 2006, Fitch raised the ratings of ten countries to Investment Grade and therefore the chances for a BB+ country of reaching the much coveted goal in just one year is only of 18.3%, while the chances that a BB rating makes it is only of 5%. However in a three year period chances for a BB rating increase to 23%.

Brazilian analysts speculate that if the country reaches Grade Investment, sovereign bonds will mean a boom in investment.

Mercopress

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