Brazil Credit Rating Upgrade Paves the Way for Reduced Risk Premium, Officials Say

• Brazil's upgraded credit rating by Moody's highlights that the risk premium in the country’s local yield curve does not reflect its fundamentals and should be reduced, Finance Ministry officials told Reuters on Wednesday, October 2, 2024.
• Tuesday's upgrade to Brazil’s long-term issuer and senior unsecured bond ratings to Ba1 from Ba2, coupled with its Positive outlook meant the country is one notch from regaining investment grade status.
• The upgrade reflects material credit improvements, which Moody’s expects 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.
• The credit agency also noted that the credibility of Brazil's fiscal framework is still moderate. However, its relatively high cost of debt, robust growth and consistent fiscal policy adherence to the fiscal framework should allow the debt burden to stabilise in the medium term, albeit at relatively high levels.
• Brazil’s positive rating outlook reflects the possibility that steady growth and compliance with the sovereign’s fiscal framework will help enhance institutional credibility and reduce borrowing costs more markedly than currently assumed. 
• Speaking anonymously, a senior ministry official said Moody's action, taken amid strong market scepticism reflected over Brazil's fiscal outlook, would help restore normality. "The revision, together with the maintenance of a positive outlook, should start to encourage non-resident inflows, as they tend to anticipate investment-grade status," the official said. "As it becomes credible that we'll regain investment grade by 2026, the movement should intensify by 2025."

(Sources: Reuters & Moody’s Investor Services)