iShares MSCI Brazil ETF: Brazil Local-Currency Outlook Raised To Positive By S&P

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August 26, 2011 12:01am NYSE:EWZ

Larry Levinson:  Brazil’s local-currency rating was raised to “positive” from “stable” by Standard & Poor’s Corp. as the rating company changed its method for calculating the risks of default.

S&P also affirmed its ratings for the country of BBB-/A-3 on foreign currency and BBB+/A-2 on local currency. The foreign-currency outlook remains positive. S&P also affirmed its BBB+ transfer and convertibility assessment and its brAAA national-scale rating on Brazil.

The outlook was changed after the company revised its method for calculating sovereign debt and risk.

“The positive outlook reflects the growing likelihood that the factors supporting Brazil’s macroeconomic stability will continue to strengthen in coming years, gradually reducing the sovereign’s fiscal constraints and vulnerability to external shocks,” S&P said. “Good long-term growth prospects combined with improving external liquidity and deepening local capital markets — could bolster the government’s capacity to manage sudden adverse changes in global economic conditions.”

S&P warned, however, that uncontrolled inflation, or looser fiscal policy could “stall the recent improvement” in macroeconomic outlook and freeze the ratings at the current levels.

Separately, the national statistics agency said unemployment fell to 6.0 percent in July from 6.2 percent the month before. Average real wages rose 4 percent from a year ago to 1,613 reais ($999.50) a month, the report showed.

“This wage number has left it clear that Brazil and domestic demand are still accelerating,” Andre Perfeito, chief economist at Sao Paulo-based Gradual Investimentos, told Bloomberg. “Wage growth is strong, putting into question the possibility of a rate cut.”

The central bank has been raising its benchmark interest rate in an attempt to stave off inflation, last calculated at 7%. The lending rate is currently at 12.5%.

Yesterday, the central bank reported that loan defaults in July rose to their highest level in 17 months. Loans more than 90 days past due rose to the equivalent of 5.2% of outstanding loans in July from 5.1% in June.

The level is the highest since Feb. 2010, when the indicator hit 5.3%.

Company defaults rose to 6.6%, the highest in 11 months, while individual defaults were unchanged at 3.8% for the third consecutive month.

The iShares MSCI Brazil Index ETF (NYSE:EWZ) is down almost 25% from its peak in April at $60.79.

To some, this makes the Bovespa a bargain.

Written By Larry Levinson From Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.

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