Brazil’s Credit Rating Outlook

By Luciana Magalhaes and Fabricio de Castro

SAO PAULO (Reuters) – Fitch is unlikely to upgrade Brazil’s credit rating in the near term despite better-than-expected economic growth. This hesitance stems from concerns over the nation’s ability to significantly improve public finances, according to a director in its sovereign ratings group.

Fitch currently assigns Brazil a credit rating of BB, which is two notches below investment grade, with a stable outlook.

“To raise Brazil’s credit rating, we would need to have greater confidence in the government’s ability to deliver primary surpluses,” stated Todd Martinez, a senior director and co-head of America’s sovereigns, on Thursday.

In contrast, Moody’s lifted Brazil’s credit rating this week to a notch below investment grade, marking a vote of confidence in Latin America’s largest economy, which has struggled to maintain a low-risk rating for nearly a decade.

Fitch adopts a more conservative stance than Moody’s, which raised the country’s long-term issuer and senior unsecured bond ratings to Ba1 from Ba2, maintaining a positive outlook.

Martinez noted that economic activity in Brazil has continued to exceed expectations, with projections for gross domestic product growth at around 3% in 2024. However, public finances remain a weak spot, affecting confidence and exchange rates, and ultimately growth.

Despite the challenges, Martinez praised President Luiz Inacio Lula da Silva’s administration for its efforts to enhance the fiscal situation through revised tax rules and an agreement to revert payroll exemptions. Yet, Fitch anticipates that the federal primary deficit will increase to 1.0% of GDP in 2025 from 0.6% this year, before dropping to 0.8% in 2026.

Based on Fitch’s current growth and interest rate expectations, the debt-to-GDP ratio is projected to rise from 77.8% this year to 83.9% by 2026. Lula and his economic team aim to restore Brazil’s investment grade status, lost in 2015. During a recent trip to New York, he engaged with representatives from major rating agencies to discuss Brazil’s credit score.

S&P also aligns with Fitch, rating Brazil at BB with a stable outlook.