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Fitch Raises Brazil Debt Rating, but Currency Strength Poses Problem for US, Chinese Exporters
Apr. 7, 2011

Published by Minyanville

More good news comes for Brazil this week as ratings agency Fitch lifts its rating of the country’s local and foreign currency debt. The move is a “thumbs up," according to the Financial Times, of new president Dilma Rousseff’s efforts to rein in spending and curb inflation.

Fitch’s rating for Brazil’s local and foreign currency debt is up at BBB from BBB-, “one more notch into investment grade territory,” says the paper, while its country ceiling has been raised to BBB from BBB+.

“The transition of power to the Rousseff administration has been smooth and the consensus on responsible macroeconomic policies remains well-anchored,” read a statement from Fitch. “Moreover, the Rousseff administration has displayed signs of greater fiscal restraint, which coupled with healthy growth prospects should allow for a fall in Brazil’s heavy general government debt burden.”

The statement went on to take note of the fact that GDP last year grew 7.5% and predicted a “soft-landing” for growth to reach 4% this year.

The good news from Fitch coupled with higher international commodity prices on Tuesday helped boost the real to 1.6075 to the US dollar -- its strongest level since August 2008. This is not entirely good news, however. The currency has gained a whopping 45% against the dollar over the past two years, cutting profits for exporters and manufacturers.

The Financial Times illustrated this problem nicely during world-famous Carnival celebrations last month. Some 80% of costumes on show at the event, it claimed, were imported from China.

Brazil is to add a tax on foreign loans, finance minister Guido Mantega announced this week, in a latest attempt to counter the causes of this.  He blamed US policy that keeps interest rates there near zero. The extension of the 6% tax on short-term foreign currency loans is the fourth capital control introduced since October, and will last two years.

Chinese and US exports to Brazil are to suffer as Brazil slaps an anti-dumping tariff of $4.1 per kilogram on some Chinese-made synthetic fibers. The idea is to curb imports by adding tariffs when the manufacturer sells goods abroad below their production or domestic price -- dumping. The legislation will apply for five years. A six-month anti-dumping tariff is being applied to n-Butanol exported by certain US companies.

The country’s already high inflation -- 6% in the 12 months to mid-March -- looks like it could worsen as state oil firm Petrobras announced that it may raise domestic fuel prices if oil prices remain at their currently high levels, thanks to events in the Middle East. The company is keen to maintain stable prices for consumers by modifying prices infrequently rather than allow them to fluctuate with worldwide markets.

Petrobras feels it will need to tap into debt markets to fund heavy investments over the coming years. “We have the need to raise between $12 billion and $18 billion in coming years, and if there is an opportunity in the domestic market, we could analyze that,” said Chief Financial Officer Almir Barbassa. The company is hoping to invest $50 billion in 2011 as it develops large offshore oil fields. It has, however, been forced to import 1.5m barrels of gasoline this month as domestic use rises.

Murilo Ferreira will take the helm of iron ore exporter Vale (VALE) after the departure last week of chief executive Roger Agnelli. The government is keen to at least align the former state-owned company’s interests with the state. This, according to the Wall Street Journal, has left investors scrambling to gauge how far the company will be pushed into money-losing projects in the national interest. The company’s share price has dropped 10% this year alone as investors are nervous about enthusiastic intervention from the government.

A senior government official said this week that Brazil is keen to increase regulation of the domestic ethanol market in order to ensure output. Brazil’s National Oil Agency (ANP) has been instructed by the government to draft regulations that treat ethanol as a “strategic fuel." Shares in Brazil’s Cosan (CZZ), the world’s largest sugar and ethanol producer, dropped accordingly.




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© Girish Gupta