S&P improves rating but predicts worsening of the Brazilian economy in 2024

Despite having raised Brazil’s long-term credit rating from BB- to BB on Tuesday (19), the risk rating agency S&P estimates that Brazil’s GDP will slow down to 1.5% in 2024.

The number is almost identical to the median of financial market expectations (1.51%) and lower than predicted by the Organization for Economic Co-operation and Development (OECD) in a report released on Monday (18), of 1.8 % of GDP, and which was criticized by President Luiz Inácio Lula da Silva (PT).

Lula said this Tuesday that the OECD will be wrong in its forecast for the Brazilian economy. The expectation of the Economic Policy Secretariat (SPE) of the Ministry of Finance is growth of 2.2% in 2024.

“I saw a headline from the OECD judging the Brazilian economy. I want to take this opportunity to tell the OECD people that when it comes to the end of next year, I will invite you to have coffee and prove that you were wrong in relation to Brazil’s forecast “, said Lula during a live broadcast on his social networks.

S&P’s expectations, highlighted in the agency’s report, are the result of the slowdown in global economic growth and, with it, external demand. The Brazilian economy has already been slowing down during this second half of the year. In the third quarter, for example, GDP changed by just 0.1%, after growth of 1.4% in the first quarter of the year and 1% in the second.

For 2023, S&P’s forecast is for growth of almost 3%, driven by strong agricultural performance and its repercussions throughout the first half of the year. Thanks to the strong production of commodities and the low need for external financing, S&P points out that the country is stable and will maintain a strong external position.

The agency states that Brazil’s growth trajectory has improved in recent years, but remains one of the weakest among emerging countries.

Rating increase is the result of structural reforms since 2016

Despite the improvement, the Brazilian rating remains in speculative territory, two steps below the so-called investment grade, a guarantee that the country will not default on its public debt. S&P’s outlook is for rating stability over the next two years.

The last time S&P had raised the Brazilian debt rating was in 2011, when Brazil went from a BBB- rating (investment grade) to BBB (one level above investment grade).

The country lost its investment grade status in September 2015, as a result of the recession promoted by the Dilma Rousseff (PT) government. Since then, the country has suffered successive relegations. In June this year, the agency had changed Brazil’s rating outlook (until then at BB-) from stable to positive.

The current change occurs after the approval of the tax reform, but the agency highlights that the assessment is due to the history of implementing “pragmatic policies” in the country over the last seven years. This includes pension reform, the autonomy of the Central Bank, the establishment of fiscal rules and also a series of microeconomic reforms in all sectors.

Report highlights the country’s institutional climate

The report highlights, for the first time, the institutional scenario with the stability factor. “We also believe that Brazil’s institutional structure can support the formulation of stable and pragmatic policies, based on broad checks and balances in the Executive, Legislative and Judicial branches of government. We expect a very gradual fiscal correction, but we anticipate that fiscal deficits will remain high”, assesses S&P.

The agency warns that the fragmentation of the institutional framework, characterized by fragmented political and economic interests, will imply approaching the problem of fiscal rigidity slowly.

“The missing component has been the lack of progress in addressing the Brazilian government’s large, rigid and inefficient spending. Over time, this has resulted in consistent fiscal deficits, squeezing resources from the financial sector and partially explaining Brazil’s weak growth “, points out the agency.

“The large size of the government apparatus is partially due to a very detailed constitution, derived from fragmented political and economic interests and which requires large sums of political capital to be corrected”, he assesses.