Moody’s upgrades Brazil to Baa3 and assigns a positive outlook
New York, September 22, 2009 — Moody’s Investors Service has upgraded Brazil’s foreign- and local-currency government bond ratings to Baa3 from speculative-grade Ba1. The outlook on the new ratings is positive.
“The upgrade reflects Moodys recognition that the country’s shock absorption capacity, including the authorities’ policy response capability, points to a material improvement in Brazil’s sovereign credit profile,” said Mauro Leos, Moody’s regional credit officer for Latin America.
“Evidence of strong economic and financial resilience, features typically associated with investment-grade sovereign credits, can be seen in the modest and short-lived contraction in GDP, minimal weakening in the country’s international reserve position, moderate deterioration in the government debt indicators and lack of financial stress in the banking system,” said Leos.
Even though the economy will report negative GDP growth in 2009 and the fiscal accounts will deteriorate with respect to previous years, Leos said, Brazil’s overall performance proved to be better than that of several Baa-rated investment-grade countries — the rating category to which Brazil now belongs.
Leos said the rating upgrade is part of an ongoing process intended to identify countries that have become “ordinal winners” throughout the period of global economic and financial turmoil. This process has led to a repositioning of sovereign ratings on Moody’s global scale for countries whose sovereign credit profiles, while already on a medium-term upward path, have proved to be less vulnerable relative to peers.
“The notable improvement reported in the government debt structure was an important contributing factor to the rating upgrade and to the positive outlook, “said Leos. “Reduced sovereign credit risk was a direct result of lower exposure in the government balance sheet to exchange rate and interest rate risks.”
Future improvements in the government’s credit standing would require additional progress in the debt structure with special attention given to the reduction of rollover risks by lengthening average maturities.
“Stronger growth prospects and the likelihood that continued macroeconomic stability would help secure single-digit interest rates are conditions that could potentially improve government debt dynamics,” said Leos.
While necessary, he added, those conditions may not to be sufficient in the absence of a clear policy commitment to primary surpluses consistent with a downward trend in government debt indicators.
“The authorities’ ability to implement actions that resume positive trends in the fiscal accounts will be critical to assure continued improvement in Brazil’s sovereign credit standing within the Baa peer group,” cautioned Leos.
“Moody’s believes the chances that Brazil will stay on a multi-year path of improved creditworthiness are reasonably high,” explained Leos. “For this reason, we have assigned a positive outlook to Brazil’s sovereign ratings.”
He added that the positive outlook also denotes the absence of macroeconomic imbalances in the Brazilian economy, a condition that places the country in a privileged position relative to other sovereign credits in the same rating category, some of which face fundamental external or fiscal challenges.
“The presence of favorable growth prospects — if combined with a policy stance that builds on the progress made in previous years — could improve Brazil’s medium term sovereign credit perspective,” said Leos.
Ultimately, he said, the prospect of a further upgrade will depend on the political will of the authorities to remove obstacles to Brazil’s economic potential. A permanent correction of fiscal imbalances that have led to persistently high government financing requirements would be crucial in this respect.
At this time, Moodys has also upgraded Brazil’s country ceiling for foreign-currency bonds to Baa2 from Baa3 and the country ceiling for foreign-currency bank deposits was to Baa3 from Ba2. Both ratings have a positive outlook. Brazil’s local-currency deposit ceiling and local-currency bond ceiling were not affected.
The last rating action with respect to the government of Brazil was implemented on July 6, 2009, when Moody’s placed the government’s foreign and local-currency bond ratings on review for possible upgrade. Brazil’s country ceiling for foreign-currency bonds was also placed on review as was the country ceiling for foreign-currency bank deposits.
The principal methodology used in rating Brazil was Moody’s Sovereign Bond Methodology, published in September 2008 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody’s website.