Moody’s Investors Service decision to upgrade Brazil’s credit rating on Tuesday received a muted response from investors and led some analysts to question the timing of the move given Brazil’s fiscal challenges.
São Paulo’s B3 stock exchange benchmark Ibovespa index and the Brazilian real both appreciated by less than 1% on Wednesday after Brazil’s sovereign rating was raised by one notch to Ba1 on Tuesday.
“I do not expect structural changes in Brazilian assets in the domestic and international markets,” Gino Olivares, chief economist of Azimut Wealth Management, told LatinFinance. He said he regards Moody’s decision to raise Brazil’s rating to one step below investment grade as “a gamble that things will get better.”
“The fiscal situation is still precarious, which is reflected in asset prices,” Olivares said.
Moody’s based the upgrade on Brazil’s economic growth, the ongoing tax reform and its energy transition program, which has included sovereign sustainable bond issuances. The agency said it expects Brazil to address its fiscal difficulties and stabilize the gross debt-to-GDP ratio at 82% in the medium term.
“Moody’s is a bit more optimistic than the market about prospects for gradual fiscal consolidation, compliance with the fiscal framework, and public debt stabilization,” said Martin Castellano, chief economist for Latin America at the Institute of International Finance.
Others said the upgrade appeared to be a vote of confidence in Finance Minister Fernando Haddad’s ability to implement fiscal discipline and bring the public finances under control in a challenging environment.
POLITICAL BOOST
“The fiscal story is a bit less rosy or less compelling,” said Patryk Drozdzik, senior emerging markets macro strategist at Amundi Investment Institute. “Still, it is a pretty good victory for the administration and Haddad’s efforts. He has been trying to keep the fiscal story as prudent as possible, which has not been easy at all. His political capital is being boosted quite a bit.”
Drozdzik added: “The administration’s prudence is required to keep the market engaged. This upgrade may be precisely about that. It will keep Haddad even more keen to fight for the targets and Lula more willing to support his stance.”
Still, Castellano said fiscal concerns remain high amid expenditure rigidity and limited austerity measures. “Additional efforts are needed to stabilize the debt-to-GDP ratio, allowing for further credit rating upgrades. These include adjusting the framework to contain mandatory spending. While current economic and policy conditions help avoid the most adverse scenarios,” he said. “Brazil still has a long way to achieve investment grade status.”