Brazil credit rating upgrade paves the way for reduced risk premium, officials say
2024.10.02 10:44
By Marcela Ayres
BRASILIA (Reuters) – The upgrade of Brazil’s credit rating by Moody’s (NYSE:) highlights a risk premium in the local yield curve that does not reflect the fundamentals of Latin America’s largest economy and should be reduced, Finance Ministry officials told Reuters on Wednesday.
Following Tuesday’s upgrade of Brazil’s long-term issuer and senior unsecured bond ratings to Ba1 from Ba2, moving the country just one notch from regaining investment grade, the Brazilian real opened 1% higher against the U.S. dollar.
Meanwhile, interest rate futures were trading lower, though still above 12% for longer maturities -levels many economists consider high and unsustainable in the long run.
Speaking anonymously, a senior ministry official said Moody’s action, taken amid strong market skepticism reflected in asset prices over Brazil’s fiscal outlook, would help restore normality.
“The revision, together with the maintenance of a positive outlook, should start to encourage non-resident inflows, as they tend to anticipate investment-grade status,” the official said.
“As it becomes credible that we’ll regain investment grade by 2026, the movement should intensify by 2025.”
A second official noted that the current market pessimism reflects what is often an “ideological” view of public finances under the leftist administration of President Luiz Inacio Lula da Silva.
Finance Ministry officials have emphasized that Brazil remains committed to meeting the target of eliminating its primary deficit this year and next, with a 0.25% gross domestic product (GDP) margin.
Market souring has intensified amid recent government measures considered controversial on how spending, tax exemptions, and new revenues are accounted for, which have raised concerns among experts about the credibility of the country’s new fiscal framework and its debt trajectory.
Brazil’s gross debt has increased 4.1 percentage points year to date, to 78.5% of GDP in August.
On Tuesday, central bank chief Roberto Campos Neto said the yield curve’s risk premium seemed “exaggerated” compared with peers, whose economies are also not generating primary surpluses.
