Transcript Can Brazil Qualify for the Investment Grade League?

Can Brazil Qualify for the Investment Grade
League?
Shelly Shetty
Senior Director
Agenda
Brazil’s Macro Picture
Brazil’s Credit Dynamics
Brazil versus India: Comparing Two of the BRICs
Agenda
Brazil’s Macro Picture
Brazil’s Credit Dynamics
Brazil versus India: Comparing Two of the BRICs
Brazil in a Snapshot
2003
2004
2005
2006
2007
2008
2009
Real GDP growth (%)
1.1
5.7
2.9
3.7
5.4
4.3
4.1
Consumer prices
(ann. avg. % change)
14.3
6.1
5.7
2.7
3.7
4.0
4.0
CXR (% change)
18.7
28.7
22.3
18.8
19.4
8.4
8.5
CAB (% of GDP)
0.7
1.7
1.6
1.2
0.3
-0.7
-1.2
-5.8
-3.4
-3.6
-3.5
-2.4
-2.3
-2.2
Govt. balance (% of GDP)
Source: Fitch Ratings.
Brazil’s likely to be more resilient to external turmoil
External Financing Needs (USD Bn)
> Ample international liquidity
Current Account
> Lower external financing needs
> Liability management has
reduced FX exposure of public
debt
Debt repayments
Financing need
80
70
60
50
40
> Central bank has the choice to
let FX act as a shock absorber
30
20
10
0
-10
Source: Fitch Ratings.
2009f
2008f
2007f
2006
2005
2004
2003
2002
2001
2000
1999
1998
-20
Brazil’s more diversified export base provides cushion
Brazil Exports to Major Markets
2001
Latin
America
12%
2007
Africa
4%
Europe
35%
Asia
15%
Latin
America
15%
Africa
7%
Europe
34%
In 2007, Brazil
exported
USD$11bn to
China, up from
USD$2bn in 2001.
Asia
19%
US
30%
Middle
East
4%
US
20%
Note: Europe – EU & Eastern Europe countries, Latin America – Aladi & Mercosur
Source: Ministerio do Desenvolvimento, Industria e Comercio Exterior.
Middle
East
5%
Agenda
Brazil’s Macro Picture
Brazil’s Credit Dynamics
Brazil versus India: Comparing Two of the BRICs
Brazil upgraded to ‘BB+’ in May 2007
Rapid growth in international reserves has reduced Brazil’s external vulnerability
Solid improvement in external solvency ratios
Brazil has emerged as a net public sector external creditor
Continued macroeconomic and political stability
International Reserves (USbn)
Liquidity Ratio (%)
(US bn)
NPXD
(%CXR)
Brazil
(%)
300
250
100
250
200
75
200
150
'BBB' Median
'BB' Median
50
25
Source: Fitch Ratings.
2009
2008
-50
2007
0
2006
-25
2005
2009
2008
2007
2006
2005
2004
2003
0
50
2004
50
0
2003
100
100
2002
150
2001
>
>
>
>
What is slowing Brazil’s ascent to Investment Grade?
> A heavy public debt burden
2008
BBB
Median
4.4
5.3
8,031
7,286
4.0
5.7
CAB (% of GDP)
-0.7
-1.5
Govt. balance (% of GDP)
-2.7
-1.7
Govt. debt (% of GDP)
65.2
24.9
Govt. debt (% of revenue)
171.5
102.5
Net external debt (% of CXR)
-13.7
9.6
Net public external debt (% of CXR)
-45.4
-25.6
18.2
10.1
196.2
161.2
Brazil Key Indicators
> Unfavorable domestic debt
profile
> Weaker growth prospects
compared with IG Sovereigns
> Public debt dynamics not
improving fast enough
Real GDP growth (%, 5 yr avg)
GDP per capita (USD)
Consumer prices (% change)
External debt service (% of CXR)
Liquidity ratio (%)
Still Unfavorable Domestic Debt Composition
Average term of fed securities
(number of months)
Domestic Debt by Type
Floating & Inflation Linked
Exchange Rate
100%
45
Fixed
Other
40
35
80%
30
25
60%
20
15
40%
10
5
20%
Source: Bacen.
Source: Fitch estimates using BCB data.
2008
2007
2006
2005
2004
2003
2002
2001
0%
2000
Dec-07
Jun-07
Aug-07
Oct-07
Apr-07
Dec-06
Feb-07
Oct-06
Aug-06
Feb-06
Apr-06
Jun-06
2005
2001
2003
0
What will Fitch Ratings monitor in the coming months?
Real Interest Rate – Selic*
2003-2007
16
14
> Brazil’s resilience in the
unfavorable external environment
> Central bank’s monetary and
currency management
12
10
> Signs of sustained investment
and GDP growth
8
4
> Improvements in external
solvency and liquidity ratios
2
> Fiscal performance
0
> Reform progress
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
6
*Note: Uses average nominal Selic and prospective inflation (IPCA index) for the next 12 months.
Source: Bacen.
Why Peru was upgraded first to IG
NPXD
(% of CXR)
Real GDP Growth (5-yr avg)
2007
2008f
8
0
-10
7
-20
6
-30
-40
5
-50
4
Govt Debt (% of GDP)
3
80
2
60
40
1
20
0
0
2000
2000
2002
Source: Fitch Ratings.
2004
2006
2002
2004
2006
2008f
Brazil
Peru
BBB Median
2008f
But Brazil outshines Peru on Governance Indicators
Governance Indicators
Political Stability
100.0
50.0
Control of
Corruption
0.0
'BBB' Rating Median
Brazil
Peru
Source: World Bank and Fitch.
Rule of Law
Gov't
Effectivness
Agenda
Brazil’s Macro Picture
Brazil’s Credit Dynamics
Brazil versus India: Comparing Two of the BRICs
Brazil and India: Similar in many respects
GDP Growth by sectors
> Large and closed economies
India
– Brazil GDP (2007e): USD1.2 trn
Primary
18%
– India GDP: (2007e): USD 1.1 trn
> Weak Public Finances
> Deep and sophisticated
domestic bond markets
Industry
28%
Brazil
Primary
6%
> Robust external liquidity and
solvency ratios
> Suffer from cumbersome
coalition politics
but India was assigned IG in
August 2006.
Services
54%
Industry
30%
Services
64%
Source: National Authorities
India’s growth story more sustainable
Saving and Investment rates
India Saving
India Investment
> Higher saving and investment
levels
Brazil Saving
Brazil Investment
40
> India’s manufacturing sector
restructured since mid-90s
35
30
> India has shifted towards
knowledge economy
25
20
> India is less commodity
dependent
15
10
5
Source: Fitch Ratings.
2009f
2008f
2007
2006
2005
2004
2003
2002
2001
2000
0
but Brazil’s Per Capita
Income is nearly 7 times
that of India.
India’s Debt Dynamics more favorable
General Government Debt (%GDP)
India
> GOI issues mainly long-term
fixed rate bonds
Brazil
100
> GOI issues 10-year fixed rate
bond at 8%
90
80
70
> GOI domestic markets very
captive in nature
60
50
> GOI has no external bond debt
40
30
20
10
Source: Fitch Ratings.
2009f
2008f
2007
2006
2005
2004
2003
2002
2001
0
India’s fiscal problems may have easier solutions
Revenues (% GDP)
Brazil
India
40
35
30
25
20
15
10
5
0
2000
2001
Source: Fitch Ratings.
2002
2003
2004
2005
2006
2007
2008f
2009f
External strengths: India’s international reserves
more robust
International Reserves/GDP (%)
International Liquidity ratio (%)
Brazil
India
Brazil
350
30
300
25
250
India
20
200
15
150
Source: Fitch Ratings.
2009f
2008f
2007
2006
2005
2004
2003
2002
2009f
2008f
2007
2006
2005
2004
0
2003
0
2002
5
2001
50
2001
10
100
Brazil’s Relative Strengths
>
>
>
>
Brazil’s financial markets have been repeatedly tested
Brazil’s has consistently run primary surpluses
Improvement in Brazil’s external solvency ratios more dramatic
Higher level of per capita income and greater political stability
Brazil NXD (%CXR)
India NXD (%CXR)
Brazil NPXD (%CXR)
350
120
300
100
India NPXD (%CXR)
80
250
60
200
40
150
20
100
0
50
-20
-40
0
-60
Source: Fitch Ratings.
2008f
2007
2006
2005
2004
2003
2002
2001
2000
-80
1999
2008f
2007
2006
2005
2004
2003
2002
2001
2000
1999
-50
Fitch Ratings
www.fitchratings.com
Fitch Group
New York
One State Street Plaza
New York, NY 10004
+1 212 908 0500
+1 800 75 FITCH
Fitch Ratings
Fitch Solutions
London
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London
EC2A 1RS
44 20 7417 4222
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