Fitch raises Brazil’s rating, keeps stable outlook

Ratings agency Fitch on Wednesday upgraded Brazil’s credit rating from BB- to BB with a stable outlook. The move doesn’t bring Brazil’s score out of junk territory, but it “reflects better-than-expected macroeconomic and fiscal performance amid successive shocks in recent years,” the agency said. 

Fitch projects GDP growth of 2.3 percent for Brazil in 2023 — almost three times as high as its previous 0.7 percent forecast. 

For economist André Perfeito, the move creates even more conditions for the Central Bank to promote a half percentage-point cut in Brazil’s monetary policy rate. In previous decisions to keep the benchmark interest rate at the current 13.75 percent, the bank had cited concerns about the fiscal outlook of the country as well as disanchored inflation expectations.

As we explained yesterday, however, both GDP and inflation forecasts have continuously improved. “The short term battle has been won,” Mr. Perfeito told his followers. “Now it’s a matter of ensuring that the long-term scenario stays on benign grounds.”

In its statement, Fitch recognized that the new leftist Luiz Inácio Lula da Silva administration brings a rhetoric of moving away from the liberal economic agenda of past administrations. Nevertheless, the agency believes that “pragmatism and robust institutional checks-and-balances will prevent deviations.” 

Moreover, the government is actively implementing measures to support the private sector, such as a tax reform. 

While the fiscal position has shown deterioration in 2023 following previous improvements, Fitch expects that new fiscal regulations and tax measures will contribute to a gradual consolidation. Although it predicts an increase in debt-to-GDP ratio, it anticipates a slower pace of rise and a better starting point compared to previous forecasts.

Fitch’s observations indicate that Brazil’s ratings are upheld by several factors. These include the country’s large and diverse economy, high per-capita income, and well-established domestic markets. Additionally, Brazil benefits from a significant cash reserve that bolsters its financing flexibility and contributes to a notable proportion of local-currency debt. 

The ratings are further supported by the nation’s ability to absorb shocks, backed by a flexible exchange rate, strong international reserves, and a sovereign net external creditor position.

However, Fitch also highlights certain constraints on Brazil’s ratings. These encompass elevated government debt levels, fiscal rigidity, limited economic growth potential, and lower governance scores. 

Last month, S&P Global revised its outlook on Brazil’s long-term sovereign credit ratings from stable to positive. It was the first positive change the agency has made in regard to Brazil’s creditworthiness since 2019. Still, it reaffirmed Brazil’s BB- rating, which is well into junk territory.

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