Why S&P's Brazil outlook upgrade surprised analysts

Standard & Poor's revised the outlook for Brazil’s ratings to positive from stable, a step celebrated by the federal government but one that surprised analysts.

"The positive outlook reflects signs of greater certainty about stable fiscal and monetary policy that could benefit Brazil's still-low GDP growth prospects," said the rating agency in a statement.

"Continued GDP growth plus the emerging framework for fiscal policy could result in a smaller government debt burden than expected, which could support monetary flexibility and sustain the country's net external position. Such developments would reinforce our view of the resilience of Brazil's institutional framework, with stable policymaking based on extensive checks and balances across the executive, legislative, and judicial branches of government," it added.

"A mention was made of the new fiscal rule, a mention of the prospects of approving the tax reform, the measures to reinstate tax spending cuts. All of this was mentioned in the note and it is important that an external agency is able to observe these advances by Brazil," finance minister Fernando Haddad told reporters.

However, analysts said the rating firm’s decision was something of a surprise.

"The upward revision of the rating outlook at this moment is surprising because the new fiscal model of the Brazilian government is still being debated in congress, there is no clear definition of what the final result will be," Luciano Rostagno, chief Latin America strategist at Banco Mizuho do Brasil, told BNamericas.

Other observers agreed.

"A positive development though somewhat unexpected given that the new fiscal framework is yet to be approved, and the outlook and final content of the indirect tax reform are still uncertain. Furthermore, there has been in recent months a clear deterioration of microeconomic policies and the regulatory environment," said Alberto Ramos, an economist at Goldman Sachs.

Currently S&P rates Brazil 'BB-/B', three notches below investment grade status. Fitch rates Brazil’s long-term foreign currency external debt at ‘BB-’, also three notches below investment grade, and Moody’s at ‘Ba2’, two notches below.

"Perhaps the revision of the outlook at this time is an acknowledgment by S&P that in the past Brazil's rating was placed at a very low level, more than necessary," added Rostagno. 

In 2008, for the first time in history, Brazil achieved investment grade status amidst economic expansion and an improved fiscal scenario, greatly benefited by the commodities boom. However, in 2015, the country lost the status following a severe economic and political crisis.