Moody's improves Brazil's outlook from negative to stable

Moody's ratings agency has kept Brazil two levels below investment grade, but improved the outlook for the country's ratings from negative to stable, which means Brazil's public debt no longer faces being downgraded any time.

Investment grade reflects a certainty the country is not at risk of defaulting on public debt. Brazil has been rated two levels below investment grade since February 2016.

In a statement, Moody's said economic stabilization and decreasing inflation help slow down public debt growth. It cited its “expectation that the downside risks reflected in the negative outlook are abating and macroeconomic conditions stabilizing, with the economy showing signs of recovery, inflation falling and the fiscal outlook clearer” among the factors behind the improvement in Brazil's outlook.

According to the agency, there are indications that the functioning of the economic policy framework is improving the conditions for the country to adopt structural reforms. “The strength of its institutions [is] recovering, supporting planned implementation of structural fiscal reforms,” the statement read.

Moody's said it is expecting Brazil's economy to begin to recover this year, whereas Petrobras's fiscal situation has begun to improve. Despite the costs for federal government accounts over the next few years, the state debt relief will have limited impact on federal coffers, according to the agency.

“A positive reform momentum emerged last year, indicating improved functioning of institutions that would support implementation of fiscal reforms and passage of the social security reform this year. Contingent liability risks related to financial support to Petrobras have diminished, reducing downside risks, while the fiscal cost of debt relief provided to state governments remains contained,” it went on.

Despite the improvement in the environment for passing reforms, the agency warned political instability could jeopardize the pension system overhaul.

Reaction

President Michel Temer celebrated Moody's announcement. In his view, it was a “recognition” of the government's “efforts” to recover economic credibility, reduce inflation, and revive growth.

In a statement, the Ministry of Finance also said that Moody's decision indicated a recognition that the government is making the right choices. “Moody's reassessment is an important recognition of the recent efforts in fiscal recovery and underscores the benefits that can be achieved with the passage of reforms,” the note read.

It went on to reaffirm the commitment of the government's economic team to reforms that can restore public fiscal balance: “The federal government reaffirms its commitment to economic recovery, which becomes evident in its efforts to approve structural reforms designed to ensure the sustainability of public finance and contribute to improving the business environment and increase productivity.”

*With additional reporting by Paulo Virgílio from Agência Brasil.

Translated by Mayra Borges