Brazilian Debt Raised to Investment Grade by S&P

April 30 (Bloomberg) -- Brazil received an investment grade credit rating for the first time from Standard & Poor\'s, sending the benchmark stock market index to a record and yields on dollar bonds to an all-time low.

Brazil, whose economy grew last year at the fastest pace since 2004, should be able to maintain annual growth of as much as 4.5 percent, S&P said in a statement today while raising the country\'s long-term foreign currency debt rating to BBB-from BB+. Foreign direct investment, which reached a record of $34.6 billion last year, is likely to cover the country\'s current account deficit this year, the ratings company said.

Brazilian exports have tripled since President Luiz Inacio Lula da Silva took office in January 2003 on rising world demand for soybeans, iron-ore, beef and cars. Brazil, once the world\'s largest emerging-market debtor, became a net foreign creditor for the first time in January as international reserves swelled to a record $171.6 billion from $37.6 billion at the start of Lula\'s first term. Credit-rating increases usually result in lower borrowing costs for nations and companies.

``This is tremendous news for Brazil,\'\' said Howard Appleby, principal for Boston-based Northern Cross LLC, who supports Harbor International Fund manager Hakan Castegren. Harbor holds $3.5 billion of stocks in Brazilian companies. ``It lowers the funding costs and the risk premium and makes Brazil a more attractive place to invest.\'\'

The Bovespa climbed 6.3 percent to 67,868.46 in Sao Paulo trading, making the index this year\'s best performer among the world\'s 20 biggest stock markets. The real strengthened 2.6 percent to 1.6623 versus the U.S. dollar, the biggest one-day gain in the currency since Aug. 17, when the Federal Reserve unexpectedly cuts its discount rate.

Yields Tumble

The yield to the 2015 call date on Brazil\'s 11 percent bonds due in 2040 fell by 21 basis points to 5 percent in New York, according to JPMorgan Chase & Co. The price rose 1.602 cents on the dollar to 136.301 cents, the highest since the country issued the securities in 2000.

Brazil\'s federal debt was 1.36 trillion reais ($813.8 billion) in March, the Treasury said April 24. Foreign debt was 106.3 billion reais. Brazil is rated Ba1, or one level below investment grade, by Moody\'s Investors Service. Fitch Ratings ranks the country at BB+.

Brazil\'s rating is now in line with those of Colombia and Romania and is four steps higher than its level in July 2002. In Latin America, Mexico and Chile, whose economies are smaller than Brazil\'s, have a higher rating.

`Big Leagues\'

``The investment grade rating rewards the country and their choice of economic policies,\'\' said Claudia Calich, who manages $1 billion in emerging-market debt for Invesco Inc. in New York. ``Lula\'s government took office with bonds trading at 40 cents on the dollar and the real at almost 4 and is now entering the big leagues of the investment grade world.\'\'

Lula, 62, benefited from a commodities boom that helped bolster export revenue and fueled economic growth. Latin America\'s largest economy expanded 5.4 percent in 2007 and is expected to grow 4.6 percent in 2008, according to estimates of about 100 economists in a central bank survey.

``The investment-grade rating puts us in a very favorable position to continue to grow,\'\' Brazil\'s Finance Minister Guido Mantega told reporters in Brasilia.

Accelerating Inflation

The acceleration in growth prompted Brazil\'s central bank on April 16 to raise its benchmark lending rate for the first time in three years as inflation accelerated above their 4.5 percent target.

``After the investment-grade rating, Brazil will be forced to make advances in the needed reforms,\'\' said Octavio de Barros, chief economist at Banco Bradesco SA, the country\'s largest non-government bank by assets. ``It\'s not possible to move backward now.\'\'

Rising food costs and consumer demand pushed inflation to a two-year high of 4.73 percent in March from an eight-year low of 3 percent in the prior year\'s period. Economists now expect policy makers to raise their target rate to 13 percent by year- end, with annual inflation estimated to reach 4.79 percent this year, a central bank survey published April 28 showed.

High government spending and public debt remains Brazil\'s ``foremost credit weaknesses,\'\' S&P said. Net government debt reached 47 percent of the country\'s gross domestic product in 2007, ``higher than in similarly rated credits and above 20 percent for the BBB median,\'\' the ratings company said.

``Investment grade should be seen as a starting point, not a final destination,\'\' said Marcelo Carvalho, Morgan Stanley\'s chief economist for Brazil in Sao Paulo. ``There is still plenty of room for improvement on structural macro reforms.\'\'

`Secondary Issue\'

The benchmark lending rate was as high as 26.5 percent in 2003. The extra yield investors demanded to hold Brazilian debt denominated in dollars reached 24 percentage points in September 2002, the month before Lula\'s victory.

``The upgrade is a measure of external solvency of Brazil, which not only reduced significantly its external debt, but also accumulated vast reserves, which makes solvency a secondary issue now for investors,\'\' said Clecius Peixoto, who helps manage $19 billion in emerging-market stocks at Emerging Markets Management LLC in Arlington, Virginia.