Moody's Upgrades Brazil's Credit Rating Due To Banking Practices

06/20/2011 04:42 pm ET | Updated Aug 20, 2011

RIO DE JANEIRO (Stuart Grudgings) - Moody's Investors Service upgraded Brazil's sovereign credit rating on Monday, giving a vote of confidence to the government's efforts to prevent Latin America's largest economy from overheating.

Moody's lifted Brazil a notch further into investment grade status to "Baa2" and retained its positive outlook, underlining the resilience of its economy compared to some European countries that are suffering debt crises and downgrades.

The agency said it awarded the upgrade because Brazil's policies had successfully dampened overheating pressures that threatened to derail the economy after torrid growth of 7.5 percent last year. It also said the South American nation was less vulnerable to credit risks than many others because of its solid banking system.

The authorities were acting to defuse an overheated economy through a combination of fiscal and monetary measures, Moody's said.

But with the pressure on politicians to spend, some analysts questioned Moody's decision despite promises by President Dilma Rousseff to curtail spending.

Kathryn Rooney Vera, senior emerging markets strategist at Bulltick Capital Markets, said Moody's move was a "bit premature," given Rousseff's relatively timid cuts to spending.

There have been calls for the government to make bolder cuts to the bureaucracy and public employee benefits.

Brazil's central bank has raised interest rates four times this year to 12.25 percent and taken other steps to curb strong credit growth. Rousseff has also pledged budget cuts of more than $30 billion to curb public spending last year that contributed to 6.55 percent inflation. Monthly fiscal numbers have shown improvement this year.

On Moody's ratings, Brazil is now one notch above India and Ireland. In another sign of improving economic stability in Latin America, Moody's awarded Colombia its second investment-grade rating in two months in May.

Moody's move follows an upgrade for Brazil by ratings firm Fitch and Standard and Poor's decision to raise its outlook to positive on its "BBB-" rating, the lowest rung in investment grade territory.

"I think investors realize that in terms of returns and in terms of GDP ratios and fiscal balances, many emerging market countries are doing better than the developed world," said Clyde Wardle, emerging markets FX strategist with HSBC in New York. "There is a lot to continue supporting Brazil."

Alexandre Tombini, Brazil's central bank chief, said Moody's decision was a recognition of the "effectiveness of the current economic policy in keeping and consolidating stability."

Brazil's real reversed losses after Moody's announcement to rise 0.3 percent to 1.591 reais to the dollar.


Mauro Leos, Moody's Brazil analyst, said the agency had maintained its positive rating because there was scope for more improvement in the fiscal accounts in the coming year.

"There is still a lot that needs to be done on the Brazil fiscal side. We would like to see ... the fiscal results to be better during booming times," he said.

"If that were to be the case, that would allow Brazil eventually to go higher in the Baa category and possibly into an A rating down the road."

Brazil first won investment grade status in 2008 after years of solid growth and fiscal discipline, banishing its reputation as a crisis-prone basket case.

Moody's said the Brazilian banking system appeared resilient enough to weather any potential credit shocks. Concerns about a credit bust in Brazil have grown as consumers have gone on a debt-fueled spending spree in recent years and are now facing sharply higher interest rates.

Banks' high capital ratios provide "a sturdy first-line-of-defense against any such event," Moody's said.

(Additional reporting by Jeb Blount in Rio and Alexandra Alper in New York; writing by Stuart Grudgings; Editing by Todd Benson and Kenneth Barry)

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