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Government executes Brady debt swap and bolsters financial management
credentials
Similar to its regional peers, Brazil decided to take advantage of the
favourable interest rates available in international markets on its
sovereign debt, as investor appetite for higher yields continues to reduce
spreads on emerging market debt. The spread to US Treasuries of the
benchmark composite J.P. Morgan EMBI+ Brazilian sovereign bond has
narrowed by 651 basis points this year to the lowest level observed since
April 2002. The government took advantage of the lower sovereign debt
spreads to raise US$ 2.3 billion in international bond markets in April
and June of this year. Furthermore, on 30 July, finance officials
successfully bought back US$ 1.3 billion in outstanding Brady bonds. The
refinancing of the Brady bonds with a renewed debt issuance in
international markets enabled the government to lower its debt servicing
costs, extend the maturity of its debt profile and release some US$ 490
million in collateral treasury bonds. The savings generated by the bond
swap should lower debt servicing costs and provide for a more sustainable
fiscal backdrop.
Economic activity slumping amid high interest rates and tight credit
conditions
The interest rate hikes adopted by the Central Bank at the beginning of
the year, have slowed economic activity substantially with some sectors
even entering recession. According to the National Statistical Institute (IBGE),
industrial production dropped 2.1% in June over the same month last year.
The June figure was down from the 0.4% decline observed in the prior month
and represented the third consecutive decline. Capital goods output
experienced the strongest decline in June with a drop of 6.5% over the
same month last year, while intermediate and consumer goods registered
more moderate declines in output of 2.6% and 1.0%.
Consumption is likely to have deteriorated further as Brazilians are faced
with higher unemployment (13.0% in June), exchange rate induced real wage
deterioration and high interest rates. IBGE national retail sales were
down 6.1% in May over the same month last year, which was up from the 3.7%
contraction observed in the previous month. In addition, automobile sales
figures from the National Automotive Vehicles Producers Association (ANFAVEA,
Associação Nacional dos Fabricantes de Veículos Automotores) point towards
further private consumption deterioration in June, as sales were 12.5%
below their levels in June 2002 and down from a 10.6% contraction in the
prior month.
Some participants see the economy as having entered recession in the
second quarter of the year as quarterly economic activity is likely to
have dropped again over the preceding quarter, following a 0.1% decline in
the first quarter. Year-on-year, however, GDP growth is likely to have
remained in positive territory with economic activity anticipated to have
decelerated further in the second quarter, nevertheless, growth is seen as
picking up moderately in the second half of the year amid a more
favourable interest rate setting. Annual growth, however, will reach just
1.7% this year, which is down 0.2 percentage points from last month’s
forecast.
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