Moody’s Improves Outlook Perspective Due to Higher Growth
Moody’s upgraded Brazil's outlook to positive from stable, maintaining its Ba2 rating, signaling a potential move to Ba1 soon. Strong growth prospects, attributed to institutional reforms, drove this shift. Despite lingering doubts, improved fiscal conditions and anticipated tax reform are bolstering confidence. Further upgrades to Ba1 by 2025 are expected pending sustained growth and fiscal stability. However, Brazil's path to investment grade hinges on continued growth and fiscal discipline. Revenue stagnation could thwart progress, risking not being improved towards the investment grade.
The Agency Rating Moody’s has improved the outlook for Brazil to positive from stable, keeping the rating at Ba2, still two degrees below the investment grade. This is an indication that Moody’s could soon upgrade Brazil's rating to Ba1, just one level below the investment grade. One of the main reasons for their change in the outlook is the growth prospects of the Brazilian economy. According to Moody’s, Brazilian growth has surprised to the upside in the last years, and it will likely remain at 2% in 2023-24, quite above the level seen between 2015-2019 (-0.5%). Moody’s states this as a direct consequence of the institutional reforms applied in consecutive Presidencies.
Although we have some doubts about whether this growth was a consequence of the reforms, results speak loudly, and we see this optimism from Moody’s as justified. The fiscal situation in Brazil, although not ideal, is far better than it was five years ago, and compliance with the new fiscal framework, although partial, could stabilize the debt/GDP ratio in the next years. Additionally, the approved Tax reform is likely to add some growth due to gains in efficiency.
The changes towards Ba1 are likely to occur in 2025, once the growth prospects are confirmed with data. However, moving back towards the investment grade will still take a while. We believe first, Moody’s will want to see whether the new fiscal framework will be followed and then, see its impact on stabilizing the debt/GDP ratio. We forecast that Debt/GDP will only stabilize in 2026 and start falling in 2027 (here). We believe that during this period, Moody’s is likely to move Brazil back towards the investment grade at Baa3.
What could jeopardize these rating improvements for Brazil is some frustration of these growth prospects and a clear deterioration of the fiscal situation. Note that Brazil is highly reliant on growth to stabilize its debt/GDP, as most of the fiscal adjustments are likely to come from the revenue side. If revenues don’t grow, this fiscal adjustment will be severely affected, which could prompt rating agencies to keep the current non-investment grade for Brazil.
Figure 1: Moody’s Rating
Source: Moody’s