Brazil Aims to Sell First Sovereign Debt in Chinese Market as Lula Seeks to Boost Trade and Investment Ties

Brazil's left-wing administration, led by President Luiz Inacio Lula da Silva, is planning to sell its first sovereign debt in the Chinese market as part of efforts to strengthen trade and investment ties with the Asian superpower. The government is also keen to re-enter the euro-denominated bond market, with deputy finance minister Dario Durigan announcing plans to issue a new dollar bond and panda bonds in China this year.

Key Takeaways:

• Brazil plans to sell its first sovereign debt in the Chinese market, with the aim of strengthening trade and investment ties with China.
• The government is also planning to re-enter the euro-denominated bond market, with Deputy Finance Minister Dario Durigan announcing plans to issue a new dollar bond and panda bonds in China this year.
• The planned issuance will test international investor appetite for Brazilian debt, which has been growing skeptical towards the policies of President Lula, who has sought to increase the state's role in the economy to boost growth and reduce inequality.
• Brazil's largest trading partner, China, has launched a charm offensive towards Latin America as it looks to broaden its economic influence.
• The planned issuance in the Chinese market is seen as a diplomatic move rather than a financial one, with instruments typically ranging in size from $200mn to $300mn.
• Brazil primarily funds itself via domestic investors, with less than 5 per cent of its public debt denominated in other currencies, mostly dollars.
• The country's last euro issuance was in 2014, and it has sold $1.5bn of a five-year dollar bond at a yield of 5.68 per cent and $1.25bn of 10-year debt yielding 6.73 per cent this month.
• Issuing in renminbi would be cheaper than in reals, possibly as low as 2 per cent for 10-year debt, but leaves currency risk, which could be hedged into dollars or reais.
• The country's central bank has lifted the benchmark rate to 14.75 per cent in an attempt to tame inflation, while opponents accuse the government of not doing enough to tackle a chronic fiscal deficit and rising debt levels.
• The government is on track to meet its 2025 target of a balanced primary budget, with a target of a primary surplus of 0.25 per cent of GDP next year.
• Moody's upgraded Brazil's long-term rating last October to one notch below the coveted investment grade status, which opens the door to cheaper capital, but revised the country's credit outlook from positive to stable last month.

Statistics:

• Brazil's public debt is denominated in less than 5 per cent of other currencies, mostly dollars.
• The country's last euro issuance was in 2014.
• Brazil has sold $1.5bn of a five-year dollar bond at a yield of 5.68 per cent and $1.25bn of 10-year debt yielding 6.73 per cent this month.
• The benchmark interest rate in Brazil is 14.75 per cent.
• The country's nominal public deficit, which includes interest payments, has widened under Lula to 7.8 per cent of GDP.
• Brazil's government is targeting a primary surplus of 0.25 per cent of GDP next year.
• Moody's upgraded Brazil's long-term rating to one notch below the coveted investment grade status last October.

Sources:

• "Brazil plans to sell its first sovereign debt in the Chinese market, with the aim of strengthening trade and investment ties with China." - Financial Times
• "The European Union wants to negotiate with Brazil to expand our bilateral trade, whether in terms of transactions or also by offering Brazil the option of issuing its bonds in Europe," - Deputy Finance Minister Dario Durigan, Financial Times
• "In many cases I would think of [panda bonds] as a diplomatic move rather than a financial one," - Graham Stock, emerging markets sovereign strategist at RBC BlueBay Asset Management, Financial Times
• "They still need to adjust the budget deficit by three percentage points of GDP to make finances sustainable." - Alberto Ramos, chief Latin America economist at Goldman Sachs, Financial Times
• "We are carrying out a progressive fiscal adjustment. In other words, we are balancing the accounts with social justice," - Deputy Finance Minister Dario Durigan, Financial Times
• Brazil has sold $1.5bn of a five-year dollar bond at a yield of 5.68 per cent and $1.25bn of 10-year debt yielding 6.73 per cent this month. - Financial Times
• Moody's upgraded Brazil's long-term rating last October to one notch below the coveted investment grade status. - Financial Times
• Moody's revised Brazil's credit outlook from positive to stable last month. - Financial Times