Moody's maintains Brazil's credit rating and changes outlook to 'positive', signaling economic improvement

The review indicates the possibility of changing the grade in the future; Currently, Brazil is two steps below 'investment grade'. This index guides investors on the safest places to invest their money.

The agency suggested the chance of a possible improvement in Brazil's credit rating in the future -Photo Reproduction/Cris Faga/NurPhoto via Getty Images

The risk rating agency Moody'sannounced this Wednesday (1st) its decision to maintain Brazil's credit rating and change your perspective of the evaluation from stable to positive. This update reflects the agency's assessment that the Brazilian economy is heading towards a solid and sustainable recovery.Brazil maintains its current Moody's rating at Ba2, a designation that places it at the "speculative grade" level, signaling a heightened risk for foreign investors. However, Moody's expressed a positive bias in its assessment, indicating a possible upgrade of the credit rating in the future.

The Brazilian Economic Context

In recent years, Brazil has been facing a series of economic challenges, including recession, high inflation and political instability. However, structural reform measures and economic policies implemented by the current government have helped boost investor confidence and stabilize the country's economic situation.In a recent meeting with Finance Minister Fernando Haddad on April 23, the agency discussed these issues, although no specific announcement was made after the meeting.

Moody's notes that the prospects for real growth in Brazil's Gross Domestic Product (GDP) are more robust than in the years before the pandemic, attributed to the implementation of structural reforms by several governments and the presence of institutional barriers that reduce uncertainty in relation to future public policies. According to the agency's note, a "more robust growth" and "fiscal consolidation" have the potential to stabilize the burden of public debt, but warn of the "risks" that threaten this path of improvement.

Moody's bases the Ba2 rating on Brazil's fragile fiscal situation, considering the country's high debt and limited payment capacity, which remains susceptible to economic or financial impacts.

Impact on Financial Markets

Moody's decision to raise Brazil's outlook to 'positive' is seen as a vote of confidence in the country's economic recovery. This could lead to a reduction in financing costs for the government and Brazilian companies in international markets. Investors use the credit rating to determine the safety of investing in specific countries or companies.

The lower the grade, the greater the associated risk - which results in higher interest rates in the economy. For example, certain European or North American funds choose to invest only in bonds issued by investment grade countries - the highest grades. Therefore, a favorable rating is crucial to attracting foreign investment and ensuring access to these resources.

Future Challenges

Currently, Brazil is two steps away from the much-desired investment grade, according to assessments by Moody's, S&P and Fitch. Although the country achieved this status between 2009 and 2015 by Moody's, since then it remains in the Ba2 credit category. The Ministry of Finance reiterates the national commitment to sustainable financial management, seeking to increase revenue and control expenses.

The government aims to achieve a solid fiscal balance, which would result in lower interest rates and improved credit conditions. This, in turn, would pave the way for more public and private investment, driving job creation, increased income and greater economic efficiency. These are crucial elements for Brazil's economic and social progress, as emphasized by the ministry.

In addition to Moody's, two other leading risk rating agencies determine whether global economies deserve the much-desired investment grade: S&P Global Ratings and Fitch. In recent years, they have all followed similar trajectories when evaluating the viability of investing in Brazil. S&P and Fitch granted investment grade to Brazil in 2008, a year before Moody's, and also withdrew it in 2014, a year earlier. In December 2023, S&P raised Brazil's rating from BB- to BB. Just like on the Moody's scale, Brazil was two steps away from investment grade.