Brazil's Emerging Economic Power: Now Investment-Grade and Why it Matters

On April 30, 2008, Standard & Poor's became the first ratings agency to raise Brazil's foreign debt to investment-grade status. This unprecedented decision, coupled with the discovery of massive new oil and gas reserves, boosts Brazil's prospects for continued, long-term economic and political stability. In partnership with the Brazil Institute, the Wilson Center on the Hill hosted a luncheon at the Rayburn House Office Building in Washington, D.C. The focus of the event was to discuss Brazil's economic position, the implications of the recent investment-grade ratings decisions, and the country's economic emergence and the challenges that it faces going forward. The discussion featured Lisa Schineller, Director of Sovereign Ratings at Standard & Poor's, and speakers Nancy Lee, Visiting Fellow at the Center for Global Development, and Otaviano Canuto, Vice President for Countries at the Inter-American Development Bank.

Schineller described the Standard & Poor's rating as a "globally comparable, forward-looking estimate of default probability," or an "assessment of the government's ability and willingness to service its debt on time, in full." She clarified that it is not a country risk rating or country investment ranking, nor is it a "recommendation to buy or sell a security, or a prediction of a security." Nevertheless, Schineller explained, the decision to upgrade the sovereign foreign debt rating does reflect upon the political and economic status of Brazil as the decision to place the rating above the threshold for investment-grade "depends on the government's policy stance and commitment, and upon the performance of various economic indicators."

The principal positive indicators that Standard & Poor's found in Brazil include a consistent macroeconomic framework and track record of policy continuity (in particular the commitment to fight inflation) through political transitions, net external debt less than 10 percent of current account receipts, a profile of government debt beginning to line-up with investment-grade credits. the growth of Brazil's middle class (signifying a growing strength in the economy and a surge in domestic demand), and the broadening base of economic growth drivers (which has attracted larger amounts of foreign direct investment). Despite these positive trends, Brazil still faces challenges ahead. Constraints include large government debt (around 40 percent of GDP) and interest burdens; budgetary inflexibility amid high current spending; and structural impediments that limit investment and growth compared with other emerging market economies. For this reason, Canuto emphasized that receiving investment-grade status is only an intermediate step in Brazil's continued development and economic emergence, especially because Brazil's new rating, BBB-, is the lowest investment-grade ranking. Nonetheless, he added, it is a clear reflection of sound economic policies and the maturation of Brazil's institutions.

Lee noted that a more open Brazilian economy as well as innovative and successful poverty-reduction programs (such as Bolsa Familia, a cash-transfer initiative) have been critical to the country's recent economic growth. It remains to be seen how President Luiz Inácio Lula da Silva's proposal to create a sovereign wealth fund will affect the economy; it could either serve as a welcomed stabilizing mechanism that promotes fiscal savings or as a tool to intervene in foreign exchange market. In the context of continuing challenges for Brazil, Lee argued that Brazil's commitment to fight inflation, expand credit access to the growing middle class, and strengthen regional integration, and the regional investment climate will determine the path that Brazil's emergence will follow. Schineller concurred, stating that the underlying assumption in the investment-grade rating is that pragmatism will continue to drive the policy decisions and actions of Brazil's government and financial sectors as they show their determination to improve the overall investment climate in Brazil.

Drafted by Matthew Layton, Brazil Institute