Amidst political chaos and uncertainty, Brazil’s economy continues on its path to recovery receiving a vote of confidence by ratings agency Moody’s. There is hope Brazil will be able to continue the necessary economic reforms once a new President takes office next year.
On 9 April, two days after former President Lula’s arrest, ratings agency Moody’s improved the outlook for Brazil’s sovereign credit rating from negative to stable, which was reaffirmed at Ba2. Moody’s move is contrary to those of other ratings agencies—Standard & Poor’s and Fitch—which downgraded Brazil’s credit rating this year.
S&P downgraded Brazil’s rating in January, and Fitch in February, due to the country’s difficulty in approving necessary reforms which affect long term economic recovery and an increase in public debt. It has been two years since Brazil had investment grade status—the higher the grade the safer it is for investment.
Moody’s made the decision because they believe the next government will be able to approve the required fiscal reforms to stabilize debt growth and comply with a spending cap—as improved economic forecasts in the short and medium term played a role. Moody’s also noted that the negative risks and uncertainties related to the reforms from last year have decreased as presidential candidates have acknowledged the importance of a pension reform.
In the detailed report, Moody’s believes the next government will work effectively with Congress to approve a pension reform that is comprehensive enough to contain the growth of compulsory expenditures and ensure compliance with the spending cap. GRI’s viewdovetails with this perspective, as all presidential candidates who are polling well at this stage, have expressed the importance of the reform for the fiscal balance and continued growth. The constant delays to the vote only make it more urgent in 2019.
The second factor leading to Moody’s decision lies in the projected average GDP growth of 2.8% in 2018 and 2019, falling interest rates, increased demand for credit and better prospects in the labor market. A continuation of the economic recovery will likely be felt in Brazilians’ wallets and increase purchasing power, especially with low inflation, which in turn makes public opinion more positive when it comes to passing reforms.
Moody’s praised the structural reforms approved by Temer’s government, since 2016, as a driver of projected growth in the medium term.
The finance team has been working to restore fiscal balance—where they have been successful in approving a spending cap, labor reform, state fiscal recovery program, revamping the Brazilian Development Bank (BNDES) credit policies and long-term tax (TLP). In addition, the finance team is committed to fiscal consolidation and recovery of economic activity and job creation.
Finance Minister Henrique Meirelles, who has been in office since the beginning of the Temer administration, stepped down on 6 April, as he considers running in the upcoming presidential election. Eduardo Guardia, the former Executive Secretary, was named to replace Meirelles.
Guardia previously held positions in the private sector at BM&FBovespa, GP Investments, Pragma Wealth Management, as well as in the public sector at the Treasury and Sao Paulo’s Finance Department.
Guardia’s appointment signals continuity in the Meirelles finance administration, even as there are 9 months left under Temer’s government, Guardia’s position will focus on management, budget execution and the privatization of Eletrobras, instead of taking on new initiatives.
Simultaneously, Moody’s raised Petrobras’ credit rating from Ba3 to Ba2—seen as a stable outlook. According to Moody’s, this decision reflects the continued improvements in the State Owned Enterprise liquidity and reduction of its leverage.
Additionally, Petrobras has shown discipline in competing for profitability in the local fuel market and in improving its financial policies.
The agency expressed that Petrobras has been able to refinance its debt, which reduced the burden of its financial commitments in the short term as well as contracted U$ 4.35billion in credit to further its liquidity.
The improvement in the outlook for Brazil’s sovereign credit rating generates positive signals to the market and may favor the attraction of investments to the country. This is particularly important as the government pushes for the privatization of Eletrobras in the coming months as well as the June pre-salt auctions – both deemed extremely important to recover fiscal balance.
Additionally, the decision by Moody’s puts a certain amount of pressure on the next government to be elected in October. At this point almost all presidential candidates have expressed how necessary economic reforms are, and that it will be a priority to their government. As the public continues to see the increase in their purchasing power they are likely to start supporting these measures, pressuring the government even more to continue a steady pace of recovery. With domestic and international pressure it is highly likely that economic reforms will pass during the first couple of years of the next president’s term.
Even though S&P and Fitch have yet to revise their ratings, overall, Brazil’s risk remains at low levels due to high international reserves (approximately U$ 383 billion) and good export performance. With international reserves that exceed its external debt, Brazil’s fiscal deterioration will likely not cause a total loss of confidence by investors – especially in debt securities. Credit ratings aside, it’s important to note that low inflation, strong oil and soy exports, and high international reserves make Brazil look like a safe place to invest.
This article was first published on Global Risk Insights, and was written by Lorena Valente.
