Election To Weigh On Creditworthiness

Notwithstanding the improvement in the general government fiscal balance in January, we continue to err on the side of caution with regards to the fiscal situation in Brazil this year, and therefore maintain a bearish bias towards Brazilian external debt. The yield on the benchmark US$ Global 2027 bond continues to trade near record low territory, having pushed back below the 6.0% mark at the time of writing, in no small part assisted by the solid macroeconomic fundamentals reflected in the labour market and encouraging nominal fiscal surplus at the beginning of the year. However, we expect perceptions of Brazilian creditworthiness to begin suffering as sovereign credit becomes ever more scrutinized by foreign investors, and fiscal policy remains firmly geared towards this year's presidential election. The heavy focus of the Lula administration on social spending and growth acceleration programmes will form a vital axis of the election campaign of Dilma Rousseff, and should therefore raise the likelihood of further fiscal profligacy in 2010.

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