See the history of Brazil’s credit ratings and understand what leads a country to have investment grade

The only period in which the country obtained a good paying seal was between 2008 and 2015. The scenario was a fall in public debt and an increase in Gross Domestic Product (GDP). The risk rating agency Moody’s raised Brazil’s credit rating from Ba2 to Ba1 this Tuesday (1st), with a positive outlook. Now, the country is one step away from the so-called investment grade, a good-paying seal granted by agencies, which assures investors of a lower risk of defaults. The new classification still indicates a “speculative degree” — which, according to risk agencies, indicates that Brazil is less vulnerable to risk in the short term, but continues to face uncertainty in relation to adverse financial and economic conditions. In other words, Brazil does not have the so-called “good payer seal”, a classification that signals a lower risk of default for those who invest in National Treasury bonds. (learn more about credit ratings below) In May, Moody’s had announced the maintenance of Brazil’s credit rating at Ba2 level and the change in the rating perspective from “stable” to “positive” — signaling a possible upgrade of the rating in the future. Fitch Ratings and Standard & Poor’s (S&P) still maintain Brazil’s BB credit rating, with a “stable” outlook, which places the country at speculative grade, but two steps away from investment grade. See the image below. See Brazil’s credit notes (ratings) in all risk agencies Arte g1 In history, the only period in which the country obtained a good paying seal was between 2008 and 2015. Entry or exit from investment grade is defined by risk agencies based on factors such as the level of international reserves, fiscal scenario and political stability. In this report, you will understand: How credit ratings work The trajectory of Brazil’s rating in each agency The Brazilian economic context What to expect ahead How credit ratings work Agencies have a long rating scale, with more than 20 notes. The higher the position, the more efficient, reliable and robust the economy — and the lower its risk. There is also a division into two main “shelves”: Investment grade; Speculative degree. Investment grade is a seal of quality that assures investors of a lower risk of defaults. Based on the credit rating that a given country received, investors can assess whether the possibility of earnings (for example, with interest) outweighs the risk of losing the invested capital due to local economic instability. The speculative level arises when the country loses its seal of good pay, because agencies fail to provide their seal of security for an investment. In this situation, it is common for the country to also lose investment opportunities. Some international pension funds, from countries in Europe or the United States, for example, follow the rule that you can only invest in bonds from countries that are classified as investment grade by international agencies. “Having this seal, therefore, facilitates the attraction of capital. And as the country receives more resources, it increases its liquidity and its capacity to make investments”, explains Alex Nery, professor at FIA Business School. According to market analysts, historically, a country that loses its good-paying status usually takes 5 to 10 years to recover. Brazil has already been at the speculative level for nine years. The trajectory of Brazil’s rating ▶️ Reaching investment grade The international agencies Fitch Ratings and S&P gave Brazil investment grade for the first time in 2008, in the second term of President Luiz Inácio Lula da Silva (PT). Moody’s granted the seal in 2009. With the changes, the country began to be recognized at that time as a safer destination for foreign investments. At the time, S&P attributed the increase in Brazil’s rating to the change in the country’s economic policy — especially with the reduction in external debt — and the improvement in growth prospects. “A larger consumer market, with growth in the capital market and formalization support investment intentions”, stated S&P at the time. For Fitch, the granting of the good paying seal was the result of “the dramatic improvement in Brazil’s results in the external and public sectors, which greatly reduced the country’s vulnerability to external problems and exchange rate shocks”. “[Além disso, o Brasil] strengthened macroeconomic stability and increased growth prospects in the medium term”, said the agency in an official note. See the history of the notes in the image below: History of Brazil’s credit notes Kayan Albertin/Arte g1 ▶️ A new increase In 2011, the country rose another notch in the good paying rating by the three agencies. It was already the beginning of Dilma Rousseff’s (PT) government. At the time, Fitch stated that the improvement in the rating reflected the assessment that the potential growth rate was sustainable. of the Brazilian economy had increased, supporting the medium-term fiscal outlook and the continued strengthening of the country’s external liquidity. S&P, in turn, highlighted that the Brazilian government was demonstrating its commitment to meeting fiscal targets. the same line and emphasized the fiscal adjustments promoted by the country. The agency pointed out that the government had been willing to reverse expansionary policies and adopt a more conservative position consistent with sustainable growth. The agency’s expectation was also for a drop in Brazil’s debt/GDP (Gross Domestic Product) ratio, in line with the country’s fiscal targets at the time. ▶️ Loss of investment grade S&P was the first to remove the good paying seal from Brazil, in September 2015. The action was followed by the Fitch agency, in the same year, and by Moody’s, in 2016. There were two years of intense crisis economy, after the end of price management under Dilma’s government. In its statement, Fitch pointed out that Brazil’s downgrade reflected a deeper economic recession than expected. He also cited the increase in uncertainty — which, according to the agency, made a fiscal control scenario difficult. S&P followed the same line and highlighted, at the time, that the country was experiencing a deterioration in public accounts, while facing political challenges. That year was marked, among other things, by discussions around fiscal adjustment and political reform. The following year, Moody’s highlighted that the rating cut was influenced by the further deterioration of Brazil’s credit metrics, in a low growth environment, with expectations of an increase in government debt in the following years. The Brazilian economic context An investment grade is not achieved overnight. The classification depends on a longer process of building trust, which is mainly based on good economic results and a stable political scenario. “The agencies analyze whether the country’s economic growth is sustainable, observe how the public debt is progressing, whether there is an effort to control the accounts. In addition to other points, such as controlling inflation, monetary policy and reforms”, explains the professor Alex Nery, from FIA Business School. An important factor for the agencies’ analysis, Brazil’s GDP, for example, had already been showing positive data years before the first increase in the country’s credit rating. In 2000, the Brazilian economy had grown 4.4%. All the following years also had favorable results, until the small downturn recorded in 2009, amid the global economic crisis that began in the United States. The subprime crisis, as the episode became known, brought terror to the financial market. In short, the problem originated from the unbridled access to real estate credit in the country, creating a bubble in the sector. The peak of the crisis occurred after September 2008, when the Lehman Brothers bank, one of the largest investment institutions in the country, went bankrupt. It was then that the contamination of the financial system spread throughout the world, generating a lack of trust and impacting the entire world. Even with the downturn in 2009, the positive data that Brazil was already recording helped maintain the level of confidence in the country. See the variation in Brazilian GDP in the graph below: In those years, Brazil also benefited from the so-called “commodity boom” — which, at the time, boosted Brazilian exports, with an overheated China — and from a series of government measures to encourage the local economy amid the global crisis. The result was the biggest increase in GDP in Brazil’s recent history, 7.5% in 2010. It was this scenario that guaranteed another increase in the country’s credit rating in 2011 by S&P, Fitch and Moody’s. Public sector debt in relation to GDP, another essential point in the agencies’ analysis, was also in a process of improvement – that is, reduction – in the early 2000s. “In 2003, the debt was, on average, more of 70% in relation to GDP. And this value was falling, reaching 63% in 2007. So, it was a decreasing relationship, which is positive in the eyes of the agencies. It means a fiscal effort”, explains Alex Nery. See the graph below: The opposite path began to be drawn years later, until it resulted in the loss of investment grade and further reductions in Brazil’s rating. In 2014, government debt in relation to GDP began a more evident upward movement, reaching the level of 70% in 2015 — the year in which the country no longer had the seal of good debt. Public debt continued to rise, reaching 80% of GDP in 2017. The scenario was enough for two new drops in the country’s ratings: in 2016 and 2018. In these years, the country’s rating fell from BB+ to BB- by both S&P and Fitch. At Moody’s, the drop was from Baa3 to Ba2. What to expect ahead With the exception of Moody’s, Brazil remains two steps away from obtaining a good paying seal from agencies Fitch and S&P. For Alex Nery, however, some barriers have made it difficult to raise Brazil’s score. One of them is the fact that the country faces a more turbulent recent political history than in mid-2008. “We also have factors such as the Covid-19 pandemic and a whole debt that has arisen as a result of recent events. This does not mean that Brazil will not achieve investment grade, but we still need to do our homework and put things in order”, says the FIA ​​professor. In the case of Moody’s, the “positive” outlook launched by the agency in May this year signals that, with the current scenario, the company can raise the country’s rating by one step towards the good paying seal. (review the art at the beginning of this report) As for S&P and Fitch, the BB rating given by the two agencies is accompanied by a “stable” outlook — which, in practice, means that there is no tendency for the rating to rise or fall. notice. After the market’s excitement with the approvals of the tax and Social Security reforms — which benefited the Brazilian rating in the latest decisions —, the challenge now lies in the execution and conduct of these and other measures already approved in the country. Alex Nery, from the FIA, also includes the fiscal framework in the account, which will be on the agencies’ radar from now on. “The design of the framework is interesting, but if the fiscal target changes too much, it loses credibility. This is another factor of attention for risk agencies”, concludes the expert.



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