Moody’s raises credit rating, and Brazil is one step closer to investment grade – 10/01/2024 – Market
The risk rating agency Moody’s Ratings raised Brazil’s credit rating from “Ba2” to “Ba1” this Tuesday (1st) and maintained the country’s outlook at “positive”.
Brazil is still at the speculative level and at a so-called investment grade level. This is where the country becomes safe — that is, with low risks of default for those who invest in its debt securities.
The agency says the improvement reflects stronger economic growth and a series of economic and fiscal reforms that increase the resilience of the country’s credit profile. The credit ratings of government debt securities were unchanged since 2016.
“Although the credibility of Brazil’s fiscal scenario is still moderate, more robust growth and a fiscal policy consistent with the scenario will allow the debt burden to stabilize in the medium term, although still at high levels”, says the report.
According to Moody’s, growth in the coming years will remain broad-based, with domestic demand driven by a relatively strong labor market.
In a statement, the National Treasury stated that the increase in the credit rating reflects the recognition of advances in public accounts and a scenario conducive to growth, in addition to the solid fundamentals of the country’s economy.
“The Ministry of Finance reaffirms its commitment to the continuous improvement of fiscal results, making efforts to increase revenue and contain expenses,” said the Treasury.
“In addition to stabilizing the debt/GDP ratio, a more robust fiscal balance will contribute to reducing interest rates and improving credit conditions, creating a favorable environment for the expansion of public and private investments.”
Moody’s states in the report that Brazil’s economic performance surprised positively in the post-pandemic period, and raised the growth outlook for this year to 2.5%.
“This year, stronger growth expanded into both the manufacturing and services sectors and was supported by increased investment, reinforcing our expectations that stronger growth will persist,” the report says.
Among the reforms highlighted are the establishment of the independence of the Central Bank, tax reform and measures that improved the business environment, such as the digitalization of finance and labor reform.
The agency, however, says that a limiting factor in the efficiency of these policies is the difficulty in meeting fiscal targets due to the rigidity of mandatory expenses.
“In a stable growth environment and given the government’s efforts to raise revenues and incipient measures to cut spending, we expect that primary fiscal outcomes will gradually improve in line with government targets over the next 2-3 years,” says the report.
HOW CREDIT NOTES WORK
Moody’s is one of the three largest risk rating agencies in the world, and its credit ratings consist of assessments of the likelihood that a bond issuer will meet its financial obligations.
International investors pay attention to the grades given by these agencies when choosing where to invest their resources. If the investor believes that, even with a lower rating, it is worth betting on the country’s bonds, he then charges a higher premium, appropriate to the risk offered by the issuer.
It is worth noting that these scores are not absolute measurements, but just a tool used in the decision-making process.
