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Brazil: Lula, Lisa and Pele

The fact that S&P upgraded Brazil despite no major improvement in the country’s macroeconomic variables was not much of a surprise.


Brazil added a new face to its roster of national icons. S&P’s Director of Sovereign Credit Rating is now considered to be a patriotic hero, feted at business events and probably a motif for one of next year’s Carnival floats.

S&P’s decision to upgrade Brazil’s sovereign debt rating to investment grade, despite a sharp deterioration of the country’s external accounts, confirmed that the rating agencies never changed their ways—in spite of the backlash from the sub-prime crisis.

Lula’s decision two years ago to make a full-court press for an investment grade rating unleashed a torrent pro-Brazil lobbying. Scores of Brazilian missions scoured the financial capitals to hype the national story. Investment banks lobbied hard for the upgrade, and hedge fund managers hounded the rating agencies for a justification of why Brazil was still below investment grade. Remembering the windfall that Moody’s reaped when it jumped the gun with Mexico, S&P decided to settle the score. However, Peru should have come first, but there was no time to waste. Brazil’s external accounts were sinking deep into the red, and S&P had to act. Like Pele sensing an opportunity for a shot, S&P’s action resulted in a goal. Hence, there is little wonder why S&P’s Director of Sovereign Credit Rating is now a Brazilian hero.


However, nothing changed. The quality of infrastructure was the same, with horrible roads, few trains and decrepit ports. Transportation costs in Brazil are so high that farms cost a fraction of the same land in Argentina. Brazil’s education and health indicators are among the lowest in the region, and a fresh corruption scandal erupts on the headlines every other week. Nothing much ever changes in Brazil. There are no new reforms. The central bank continues to doggedly pursue the tightest monetary policy in Latin America, resulting in a windfall for the financial sector. There are even rumors that Tupi and Carioca may be nothing more than conveniently-timed smoke and mirrors.

The fact that S&P upgraded Brazil despite no major improvement in the country’s macroeconomic variables was not much of a surprise, considering the amount of pressure that Brasilia and Wall Street brought to bear. However, what was surprising was the decision to act in light of the deterioration of the current account. During the first quarter of this year, Brazil posted a shortfall of $10.8 billion, versus a surplus of $7.5 billion in 2007. Although the market expects a deficit of $18 billion in 2008, we believe that the gap could be more than $30 billion. Therefore, Brazil will need all of the financing it can get its hands on—as affirmed by its decision to tap the capital markets only days after it received the upgrade.


The question is what will Brazil use the financing for? Clearly, fueling private consumption will be a priority. The government also wants to spend more on infrastructure. However, an equally important task will be to expand Brazil’s presence across Latin America. Brazil’s economic elites realized that in order to develop the transnational economy of scales needed to become a global powerhouse, they needed to dominate a geographic region. This is what Japan, China, Russia, Germany and South Africa did.

Given that the U.S. abandoned Latin America towards the end of the 1990s, Brazil is now doing its best to fill in the vacuum. Brazilian banks are expanding into Chile and Uruguay. Brazilian meatpackers are picking up plants in Uruguay and Argentina. Brazilian farmers are expanding aggressively into Bolivia, Paraguay and Argentina. Colombia’s national airline is under Brazilian control, and Petrobras is in almost every Latin American country. Lula allegedly quipped while in Peru that ‘Brazil would do more to unite Latin America with BNDES, than Bolivar was able to accomplish with the sword.’ Given that sort of strategic vision, an investment grade rating is essential for it to garner the financial resources needed to expand geographically. Therefore, it is little surprise that Lisa, like Pele and Lula, was elevated to a national icon status.

Walter Molano is head of research at BCP Securities.

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