Brazil’s credit rating rises: Moody’s upgrade comes as a surprise

Despite rising public debt, Latin America’s largest economy is approaching investment grade – a good sign for the entire region.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

The news on October 1 took the financial market in São Paulo by surprise: for the first time in eight years, the rating agency Moody’s upgraded Brazil’s country risk. At Ba1, Brazil is now just one upgrade away from regaining the investment grade it lost in 2015.

An investment grade is important for an emerging country like Brazil because it enables institutional investors such as pension funds to invest in the country’s bonds or funds. This makes borrowing easier and cheaper.

Companies and banks seeking international financing also benefit from a better country rating. Following the upgrade by Moody’s, the agency also improved the ratings of numerous Brazilian companies and banks.

The improvement in Brazil’s credit rating came as a surprise, as almost all investment banks and economists are of the opinion that Brazil’s budget deficit is too large and that debt will therefore increase too quickly. Hardly anyone expects the government to achieve a balanced or even positive budget without taking interest payments into account.

However, such a primary surplus would be necessary to give the financial markets a signal that debt will fall again. Otherwise, further interest rate hikes will be necessary to convince investors to lend money to Brazil. The key interest rate is already at a high 10.75 percent.

In fact, Brazil’s national debt has risen by almost ten percentage points since the start of the current government. Fitch Rating, for example, fears that debt could rise to 84% of GDP in the coming year (from 72% at the beginning of 2023).

However, Moody’s is not impressed by such fears. For the agency, the better-than-expected growth, now in its third year, is the main reason why Brazil is able to repay its debts thanks to higher tax revenues. The reforms of recent years (such as the autonomy of the central bank, the pension reform or stricter corporate governance rules for state-owned companies) have also increased Brazil’s productivity.

This is a surprisingly good testimony to the government’s economic and financial policy. Especially as Moody’s has not only improved the rating, but also given it a positive outlook.

Moody’s is now more optimistic than the other two major rating agencies. Standard & Poor’s and Fitch rate the country BB, two notches below investment grade, and both have a stable outlook.

Of the six largest economies in Latin America, Brazil and Argentina are currently the only countries without an investment grade rating. Chile, Mexico, Peru and Colombia have the agencies’ seal of approval.

However, rating experts believe that the outlook for all of these economies has deteriorated this year. Downgrades could follow in the medium term. The weak growth prospects in Latin America in particular have made the agencies more skeptical.

The upgrade of Brazil’s country risk is therefore a positive signal in the midst of growing skepticism.