What the Rating Agencies are saying about Brazil

Two unusual developments emerged recently in the often fraught relationship between Brazil and the big three international credit rating agencies; first, the agencies are in rare agreement about Brazil, and; second, they are saying mostly nice things about the country.
Both Standard and Poor’s and Fitch Ratings issued statements re-affirming their double-B-minus ratings and maintaining a “stable” outlook. In April, Moody’s Investors Service also issued a statement, this time maintaining its Ba2 rating, but upgrading the outlook to “stable” from “negative.”

All three agencies now maintain a “stable” outlook, with two of the agencies (S&P and Fitch) holding Brazil at three notches below investment grade and one (Moody’s) rating Brazil two notches below. Rarely have the agencies been this close to unanimity. They also seem to agree on the prognosis, which is guardedly optimistic, as well as the underlying diagnosis. S&P, for example, listed a number of factors on the plus side. These include something approaching a consensus among political leaders on the need to combat persistent government deficits, especially in the area of pensions. Another positive factor is Brazil’s consistent ability to produce trade surpluses and attract foreign investment.

These factors have helped Brazil create impressive foreign reserves, over $370 billion, insulating the country from overseas crises. S&P also praised the performance of Brazil’s Central Bank, which has labored to keep inflation at bay while maintaining a flexible but orderly foreign exchange market. Fitch added to the list, noting what it called “consolidated civil institutions” such as an independent judiciary unafraid to confront government corruption.

Of course, there is also a negative side, cited in various ways by all three agencies. Fitch, for example, noted Brazil’s “challenging political environment,” especially the highly fragmented presidential campaign now underway. Fitch added that the pattern of fragmentation will likely persist when Brazil’s new Congress meets in 2019, making the pathway to fiscal reform that much more difficult. All three agencies also fretted about Brazil’s economic prospects, putting 2018 economic growth in a range of 1.5% to 1.6%, with 2019 only slightly better at 2.3% to 2.5%. Moody’s summarized the overall cautious evaluations this way: “re-emergence of political dysfunction or stalled reform momentum” could trigger a downgrade…and not just by Moody’s.