Investment grade depends on fiscal effort – 10/01/2024 – Market

Economists say that the macroeconomic moment experienced by Brazil, with inflation under control and growth of almost 3% in the last year, were factors that led the risk rating agency Moody’s Ratings to raise the country’s credit rating, which is now at one step from investment grade. However, the government will have to make a greater fiscal effort for Brazil to reach the next level, they say.

For now, the country remains at the speculative level, now with a “Ba1” rating. In a report, Moody’s said that the credibility of Brazil’s fiscal scenario is still moderate.

Investment grade is a condition assigned by international risk rating agencies to securities, companies or countries to define that it is a safe investment — that is, with a low risk of default.

Credit ratings are also important for funds: many of them are prevented from investing in non-investment grade securities.

In the view of Sergio Vale, chief economist at MB Associados, the scenario of the Brazilian economy is relatively good, but the fiscal issue is “the piece that prevents the country from advancing further”. He cites a strong fiscal deficit for this and the coming years and an increase in debt.

According to official data released in the 2025 Budget proposal and in the fourth revenue and expenditure assessment report of this year’s Budget, President Luiz Inácio Lula da Silva (PT) is expected to end his term with an effective fiscal deficit in the four years of his administration.

Vale states that the fiscal framework, which replaced the spending cap, is a palliative measure. According to the economist, to turn the credit rating around and reach investment grade, this or the next government will have to make a more lasting and important fiscal adjustment, with measures such as decoupling the minimum wage from Social Security, a measure discarded by the boss of the Executive this year.

“We will need to return to this issue in 2027. This additional leap [da nota de crédito] it will depend on a much greater fiscal effort from the government”, says Vale.

In the view of Felipe Salles, chief economist at C6 Bank, to raise the credit rating to investment grade — a level considered safe and with low risks of default for those who invest in debt securities, Brazil must stabilize or reverse the debt public sector, in addition to maintaining the growth rate and continuing to control inflation.

Salles says it is important to advance administrative reform and improve the degree of openness of the economy, with greater trade flow between Brazil and other countries.

Paulo Gala, chief economist at Master bank, states that Brazil’s upgrade by Moody’s is reasonable and that the country is doing well compared to international peers such as Argentina, Mexico and India. He draws attention, however, to the results of public expenditure.

The balance of the central government’s accounts in the first half of the year was a deficit of R$68.7 billion, the worst result for the period since 2020, when the pandemic led to a deficit of R$544.1 billion in the first six months of the year .

With the economic growth observed in the country, however, everything becomes easier, says Gala. He believes that Brazil is not far from investment grade, which should happen in the next two years, according to the analyst.

“We are not very far from that. We just need to honor the fiscal framework and present some expense controls.”

Felipe Miranda, from Empiricus, also draws attention to the tax issue. Furthermore, he says that risk rating agencies no longer have the same credibility and impact on the market.

“I don’t think this represents an important paradigm shift in relation to Brazil. On the contrary, we need a credible and robust measure of attention to Brazilian fiscal spending. It’s good news, but with a marginal impact”, he states.

In a note, Fator bank cited Moody’s concern with fiscal credibility. “Serves as support for Haddad’s agenda [Fazenda]. Lula, who visited the branch in NY the other day, must be happy,” the bank wrote.

According to Fator, the agency’s decision to raise the credit rating should be seen as a little hasty by analysts.