S&P raises Brazil’s credit rating to BB after approval of tax reform

The international risk rating agency Standard & Poor’s (S&P) raised Brazil’s credit rating this Tuesday (19) from BB- to BB. The outlook for the economy was classified as stable. The change occurs after the approval of tax reform by Congress.

“The stable outlook reflects our expectation that the country will make slow progress in resolving fiscal imbalances and has a still weak economic outlook, which may be balanced by a strong external position and a tight monetary policy that is helping to return inflation towards the target”, said S&P, in a note.

S&P highlighted that the tax reform will help to partially address the complexities of the Brazilian economy. “Brazil’s growth trajectory has improved in recent years, but remains weaker than that of emerging market peers,” he pointed out.

The agency highlighted that it may lower rating ratings in the next two years if economic policy is not implemented satisfactorily, generating further fiscal deterioration and increased debt. “A deterioration in political signaling could also reduce investment flows and, therefore, weaken Brazil’s external position”, pointed out S&P.

In June this year, the agency had already raised the outlook for Brazil’s credit rating to positive for the first time since 2019. Another risk rating agency, Fitch, raised Brazil’s long-term credit rating from BB- to BB, with a stable outlook, in July. Fitch pointed out that the change reflected “better-than-expected macroeconomic and fiscal performance amid successive shocks in recent years, proactive policies and reforms.”

After the agency’s announcement, the National Treasury stated, in a note, that “S&P confirms the improvement in the credit rating trajectory given the continuity of efforts undertaken by the government to promote the country’s necessary reforms and fiscal consolidation”.

“The rating upgrade by S&P shows that we are on the right path, with correct measures that are putting the country on the path to sustainable economic and social development,” said Treasury Secretary Rogério Ceron.

The Treasury highlighted that the fiscal challenges highlighted by the agency for the country’s economy demonstrate the “need to reduce the fiscal deficit and public debt to continue improving the country’s credit rating in the coming years”.

To reach investment grade, Brazil needs to move up two positions in the S&P ranking, that is, to BBB-. The best rating level is AAA, the highest investment grade with high quality given to the best payers, while the lowest rating is D, given to countries considered to be in default.