Brazil’s stock market boom has caught the attention of foreign investors, but the question still lurks in the background like an uninvited guest: is this just another stage in the typical boom-and-bust cycle?

For the answer, take a look at Brazil’s improving balance sheet. While the United States accumulates debt, Brazil goes the other way. He decided last December to pay off his remaining $15.5 billion debt to the International Monetary Fund (that must be a relief!) crisis

Where does the money come from? Brazil posted trade surpluses in 2004 and 2005 with exports over the past twelve months reaching a record $120 billion. Exports of oil, soybeans, copper, steel, cars, sugar and coffee are rising even as the currency strengthens. The Brazilian real has risen 52% against the US dollar since May 2004 and 22% during 2005. Brazil is nearly energy independent and foreign exchange reserves now stand at $58bn, even after repaying vexing debt of the IMF.

Behind all these positive numbers there are substantial reforms initiated by President Cardosa and continued by Luiz Inacio “Lula” da Silva. Payroll taxes and corporate taxes have been reduced, the tax system has been simplified and last week Brazil announced that it would eliminate income tax for foreigners who buy public debt. Brazil’s strong currency is also likely to lead to an easing of foreign exchange restrictions.

A cynical friend of mine often comments that successful political leaders must ignore their strongest supporters if they want to achieve real reform. If so, Lula is a good example, as most expected him to reverse market reforms after taking power in 2002, when in fact he deepened them. Nevertheless, Lula, who is up for re-election in October, has improved living standards and restored national pride. With 187 million people and an area just slightly smaller than the United States, this leading economic power in South America, along with Chile and Colombia, are changing attitudes toward the region as a whole.

What is the best way to bet on the momentum of Brazil and the improvement of the balance? He had been recommending Brazil iShare (EWZ), which is up 27% this year and 72% in the last 12 months. In June of last year I switched to the S&P Latin America 40 iShare (ILO) which gives you a broader exposure with 50% exposure to Brazil, 38% to Mexico, 9% to Chile and 3% to Argentina. This ETF is up 18% this year and 69% over the last year.

One ADR to watch is wireless provider that has been on a roll America Movil (AMX) and a safer option is Colgate Palmolive, which gets about 20% of its sales from Latin American markets.

How important is the October election for Brazil? Even with all the economic growth, debt reduction, lower taxes, booming exports, and strong currency, public sector debt is still 51% of GDP, so continued progress is essential. As the old saying goes, even if you’re on the right path, if you don’t move, you could get hit.