Brazil ratings to hinge on solid reform progress

Reuters, 04.03.03, 5:25 PM ET NEW YORK, April 3 (Reuters) - Wall Street was pleasantly surprised by the depth of Brazil's Congressional support for an amendment laying the foundation for central bank autonomy, but credit agencies said they are looking for substantial progress on reforms before reconsidering the country's ratings. On Wednesday evening, Brazil's Congress gave the green light to a bill changing the financial system's legal framework, a necessary step in President Luiz Inacio Lula da Silva's plan to give the central bank more independence. The bill was hailed as a key victory for Lula and his far-reaching reform agenda, which includes social security and tax reforms. With a whopping 442 lawmakers supporting the bill -- only 308 were needed -- the vote signaled that Lula can muster up the support for politically sensitive reforms. For the ratings agencies, it was a step in the right direction but any upward movement on Brazil's rating will hinge on further progress on the reform front. The three major credit agencies rate Brazil deep in speculative territory. "I wouldn't say that this in and of itself has ratings implications," said Morgan Harting, sovereign analyst at Fitch Ratings. "But what we are looking for is for Lula to successfully assemble a workable coalition around reform. Seeing strong support in Congress for this legislation is a positive indication that he's moving in that direction," Harting added. Brazil's financial markets were abuzz with rumors on Thursday that Fitch would revise its outlook for Brazil to positive. The talk helped strengthen the currency, the real, to its strongest point against the dollar since September. Fitch rates Brazil's long-term foreign currency at B, or five notches into speculative territory. In March, Fitch changed its outlook on Brazil's ratings to stable from negative, citing a recovery in its trade performance and signs the new government was committed to policies that may put Brazil's finances on a sustainable path. The ratings agencies added that they are still waiting to see the details of Lula's social security reform, which Lula has said he would send to Congress this month. Since the government took power at the turn of the year, the signals are "broadly in the positive direction in terms of keeping the fiscal accounts on track, raising the primary surplus, monetary policy, and the emphasis on these reforms," said Lisa Schineller, a director in Standard & Poor's sovereign ratings group. "But we would like to see the content of some of the reforms, their own projects, put forward," said Schineller. S&P has Brazil's long-term foreign currency rating at B-plus, four notches into junk territory, with a negative outlook. The credit agencies also noted that Brazil's economy still has its weaknesses. "Brazil remains vulnerable to sudden changes in the direction of capital flows," said Ernesto Martinez-Alas, who analyzes Brazil for Moody's Investors Service. Moody's rates the country B2 with a stable outlook. Wednesday's bill had already been approved in the Senate, or upper house, and now needs a second reading in the lower chamber, something not expected to be difficulty after its strong approval.