How close is Brazil to investment grade?

Ratings agencies are sending mixed signals about Brazil, raising questions about how realistic a return to investment grade is.

Moody’s upgraded the sovereign rating to 'Ba1' from 'Ba2' and maintained the positive outlook, putting the country one step below investment grade.

"Technically speaking, Moody's decision leaves Brazil close to investment grade, since the outlook is positive indicating that the next rating action would be an upgrade, but this additional step in my view will require a very strong signal from the Brazilian government with measures to strengthen the fiscal side, with spending cuts, which is not so easy because this issue is sensitive to the current government's electoral support base," Mário Sérgio Lima, an analyst at Medley Global Advisors, told BNamericas.

Investment grade puts a country on the map of major global investors, such as pension funds and asset managers, who have internal rules that prohibit investing in assets with a lower rating.

"Large investment funds, mainly global pension funds, which have a longer-term investment policy and require lower interest rates than other classes of investors, generally have rules that they can only invest in assets with an investment grade status by at least two of the major rating agencies, so the government’s work on fiscal improvements has to convince other rating agencies," said Lima.

Brazil achieved investment grade in 2008, as Fitch Ratings, Standard & Poor's and Moody’s highlighted rapid economic expansion fueled mainly by the commodities boom. But the country lost the grade in 2015, as the economy and public finances deteriorated.

In a statement, Moody's attributed the upgrade to "material credit improvements which we expect to continue, including a more robust growth performance than previously assessed and a growing track record of economic and fiscal reforms that lend resilience to the credit profile, although the credibility of Brazil's fiscal framework is still moderate, as reflected in a relatively high cost of debt."

It added, "In turn, more robust growth and fiscal policy consistently adhering to the fiscal framework will allow the debt burden to stabilize in the medium term, albeit at relatively high levels."

The Moody's upgrade surprised analysts and runs counter to Fitch Ratings' assessment, which cast doubt on the government's attempts to reduce debt.

In June, Fitch affirmed Brazil's rating at 'BB' with the outlook stable, two steps below investment grade. Fitch underscored that persistent fiscal deficits expose macroeconomic vulnerabilities.

Investors have looked at the fiscal side closely since President Luiz Inácio Lula da Silva took office in January 2023 because he supports public spending and social programs to fuel the economy.

But this view isn't held by all high-level decision-makers.

"We are half a step away from investment grade because we are on a step with a positive outlook. [But investment grade is] not given. We have work to do, but it is a concrete possibility. What seemed far away seems to be at our hands, if we are not afraid to take the necessary measures to rebalance the government accounts," finance minister Fernando Haddad told reporters after the Moody's announcement.