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Brazil has no plans to sell foreign debt despite market rally

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02/17/2017 | 06:03pm CEST

The Brazilian government has no plans to sell international debt at the moment despite more favorable market conditions that have sparked a slew of sovereign bond sales in emerging markets this year, a senior treasury official told Reuters.

The Treasury's Undersecretary of Public Debt, Jose Franco de Morais, said the government has no need for external financing and that issuances from last year continue to be good benchmarks for local companies planning to sell debt abroad.

"Those benchmark remains liquid so its not a priority to issue international debt at this moment," said Morais, adding that Brazilian companies have sold $7.7 billion (6 billion pound) in foreign debt so far in 2017.

"There is no need to place another benchmark because corporates have access to markets," he added in an interview late on Thursday.

Brazil is taking a different tack than many of its emerging market peers that have taken advantage of high investor demand to sell international bonds this year amid a rally for that debt.

Five emerging-market countries issued $14.7 billion in dollar-denominated debt on Jan. 20 alone, according to Thomson Reuters publication IFR.

With external obligations representing only 4 percent of its federal public debt, Brazil has traditionally sold global bonds to set as a benchmark for local corporate issuers.

Last year, Brazil issued $3 billion in global bonds due in 2026 and 2047 after 18 months without tapping foreign markets as a deepening recession and political turmoil drove up the country's risk premium.

Although the economy remains stuck in recession, easing political tensions in the wake of leftist President Dilma Rousseff's removal from office last year have raised investors' appetite for Brazilian assets.

The Brazilian government debt's spread against U.S. Treasuries has fallen nearly 700 basis points since 2016, by far the sharpest drop among major emerging economies.

Although still high compared with its emerging market peers, the cost of insuring the country's debt against default, via credit default swaps, declined this week to its lowest since January 2015.

Morais said he expects credit rating agencies to improve Brazil's outlook to stable from negative this year as President Michel Temer moves fast to approve pension and labor reforms to rebalance public accounts and revive the economy from its worst recession on record.

"The pace of approval of reforms in 2016 surprised markets and I expect that pace to continue," Morais said. "It is clear our economy is at a turning point."

All three major rating agencies, Fitch, Moody's and S&P Global, have stripped Brazil of its covered investment grade ratings and threaten further downgrades if the once booming economy fails to bounce back from its two-year recession.

An improving ratings outlook is the first step in Brazil's quest to regain investor status and could help bring more foreign investors into the country's domestic bond market.

Foreign investors' holdings of domestic debt will likely remain stable in 2017, but it may increase if the economy turns around, Franco said.

Brazil's prolonged recession dragged down foreign investors' holdings of local debt to 14.3 percent of the total in late 2016 from 20.8 percent in early 2015, according to treasury data.

(Reporting by Alonso Soto Editing by W Simon)

By Alonso Soto and Marcela Ayres

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