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INTRODUCTION
Since 1991, Brazil has gradually returned to the international financial markets. This re-emergence is clearly indicated by the market's acceptance of Brazilian fixed-income issues. In the last four years, the Brazilian bond market has been affected by the nation's continuing process towards economic reform. Measures taken so far, such as the reduction of barriers to trade and financial services as well as the adoption of a sensible general regulatory framework, are noticeable in the daily lives of the Brazilian people. Nevertheless, further reforms will need to be undertaken and the government will have to put its financial situation in order. Inflation continues to be extremely high and there is an apparent unwillingness on the part of the executive and legislature to adopt bitter but necessary policies for constructive change.
However, it is these very problems that have created attractive opportunities in the Brazilian bond market. First, in order to counteract the monetary effect of foreign capital inflow and finance its operational deficit, the Brazilian government must continue to offer high interest rates. Second, high domestic interest rates, combined with the recent deregulation of the financial sector, have prompted Brazilian corporations (public and private) to tap the external markets, especially Eurobonds. Since the first issue by Telebras in 1991, Brazilian corporations have raised over $18.9 billion through Eurobonds, Euronotes and similar instruments. By 1993 Brazil was the second-largest Latin American issuer, raising nearly $8.6 billion in the Euromarkets.
In the domestic market, the trend towards a long-term decline in interest rates was reversed in August 1993. Uncertainty about the approval and successful implementation of the economy minister's plan have increased inflationary expectations and left the current economic team with no choice but to tighten monetary policy as a temporary measure to combat inflation. This has provided a window of opportunity for investors to lock into high local rates of return. It is generally expected that if the plan succeeds, interest rates, especially short-term ones, will be very high and will only decline three to five months after the conversion of the URV into the monetary unit. Clearly the current market offers exciting opportunities for investors willing to manage some of the political risks typically associated with emerging markets.
THE DOMESTIC MARKET
The combination of high...