Brazil Bets on 4% Borrowing Costs Under Next President as Spending to Ease

Date: Tuesday, June 22, 2010
Author: Bloomberg

Brazil is aiming to cut inflation- adjusted borrowing costs to 4 percent under the next president, less than half the level in 2006, as the economy expands and the government reins in spending.

The country’s real interest rate is “still high,” Deputy Treasury Secretary Paulo Valle said in an interview at Bloomberg’s headquarters in New York. “We want to bring it to 4 percent.”

Government bonds due in 2020 linked to Brazil’s consumer price index yielded 6.39 percent yesterday, down from 10.2 percent on similar-maturity debt four years earlier, according to data compiled by Bloomberg. The rate will fall further as the administration that takes office after October elections to replace President Luiz Inacio Lula da Silva withdraws stimulus measures, Rubens Sardenberg, chief economist at Febraban, the country’s banking federation, said in an interview.

Government spending cuts would help increase the savings rate in Brazil, which at about 15 percent of gross domestic product, half that of China’s, is too low to meet borrowing needs and keeps interest rates high, said Tony Volpon, Latin America strategist at Nomura Holdings Inc. The two candidates leading in polls ahead of the election, former Sao Paulo Governor Jose Serra and ex-Cabinet Chief Dilma Rousseff, say lower spending may help push down borrowing costs.

“If the new government in Brazil makes a clear sign in terms of fiscal policy, you can have in the short term a very aggressive reduction of interest rates,” Sardenberg said in the interview yesterday in New York.

‘Lot of Value’

Real rates in Latin America’s biggest economy compare with a 4.26 percent yield on Colombia’s inflation-linked bonds due in 2023, according to data compiled by Bloomberg. Yields on Mexico’s inflation-linked bonds maturing in June 2019 yielded 2.83 percent. Brazil’s BBB- credit rating from Standard & Poor’s, the lowest investment grade, matches Colombia’s ranking and is one level below Mexico’s BBB.

“I see a lot of value in inflation-linked bonds,” said Luis Roberto Zaratin Soares, the head of fixed-income and hedge funds at Bradesco Asset Management, Brazil’s third-largest fund manager by assets. “Real interest rates are close to six and a half percent, which is very high. In fixed income in the whole world, I don’t see a better investment than this.”

The yield on Brazil’s 6.2 billion reais ($3.5 billion) of 2020 notes, whose principal increases in line with the consumer price index, rose two basis points yesterday from 6.37 percent on June 18, Bloomberg data show. It has dropped 20 basis points from 6.59 at the end of 2009.

Cruzeiro Bond Sale

Brazilian fixed-rate bonds due in 2021 yielded 12.35 percent yesterday, down from 12.44 percent at the end of last week. The yield premium on the country’s dollar government bonds over U.S. Treasuries narrowed one basis point to 222, according to JPMorgan Chase & Co.’s EMBI+ index. The difference has fallen 29 basis points from a nine-month high of 251 on June 8.

The cost of protecting the debt against non-payment for five years with credit-default swaps fell two basis points yesterday to 126, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The real strengthened 0.1 percent to 1.7712 per dollar yesterday, trimming its loss this year to 1.5 percent.

Banco Cruzeiro do Sul SA, a Sao Paulo-based bank, is marketing three-year notes in dollars that may yield 7 percent to 7.25 percent, said investor relations officer Fausto Guimaraes. The offering, which is being arranged by BCP Securities, may take place the week of July 5, he said.

Bank Lending

Banco Cruzeiro canceled a planned 10-year dollar bond offering in May after the European debt crisis drove up borrowing costs on emerging-market debt.

Brazilian bank lending rose for a 14th straight month in April, according to central bank figures. Outstanding loans totaled a record 1.47 trillion reais, up 18 percent from the year-earlier period. Brazil’s economy expanded 9 percent in the first quarter from the same period a year ago, the fastest pace in 15 years, government data show. Growth will end the year at 7.1 percent, according to a central bank survey of about 100 financial institutions published yesterday.

‘Little’ Savings

Government spending rose 18.5 percent to 203.2 billion reais in the first four months of the year, according to the Treasury. The budget deficit widened to the equivalent of 3.2 percent of GDP in the 12 months through April from 3 percent in the year-earlier period, central bank data show.

The central bank has raised the benchmark lending rate 150 basis points, or 1.5 percentage points, to 10.25 percent from a record low 8.75 percent in April to curb inflation as economic growth accelerates. Annual inflation was 5.2 percent in May, above the government’s 4.5 percent target.

Economists expect inflation will end the year at 5.6 percent before slowing to 4.8 percent in 2011, according to the central bank survey.

The yield on Brazil’s overnight interest-rate futures contract due in January, the most active in Sao Paulo trading, fell two basis points, or 0.02 percentage point, yesterday to 11.29 percent. The yield implies traders expect policy makers to raise the benchmark lending rate to about 12.2 percent by year- end, according to data compiled by Bloomberg.

Rousseff, Lula’s chosen successor, told Veja magazine she would aim to reduce the government’s net debt-to-GDP ratio to 28 percent by 2014. The ratio, a measure of a country’s ability to pay its debt, was at 42 percent of GDP in April, central bank data show. Serra has said Lula’s government has carried out a spending spree, according to a JPMorgan report dated May 27.

“Because Brazil saves very little, the price of money, the price of resources to invest is very high,” Volpon said in a telephone interview from New York. “I only think we’re going to see real interest rates fall if the government begins to save more. And there are hopes that this will happen” in the next administration, he said.