Brazil’s Credit Rating Upgrade Could Lead to Lower Risk Premium, Officials Say

By Marcela Ayres

BRASILIA – The recent upgrade of Brazil’s credit rating by Moody’s underscores a risk premium in the local yield curve that does not align with the fundamentals of Latin America’s largest economy, Finance Ministry officials stated on Wednesday.

Following the upgrade of Brazil’s long-term issuer and senior unsecured bond ratings from Ba2 to Ba1—bringing the country just one notch away from regaining investment-grade status—the Brazilian real opened up 1% against the U.S. dollar.

Interest rate futures also saw a decline, although they remain above 12% for longer maturities, a figure deemed high and unsustainable by many economists.

An anonymous senior ministry official remarked that Moody’s action, which comes amidst significant market skepticism reflected in asset prices regarding Brazil’s fiscal outlook, is expected to help restore normalcy.

"The revision, along with the maintenance of a positive outlook, should start to encourage non-resident inflows, as these typically anticipate investment-grade status," the official elaborated. "As it becomes credible that we’ll regain investment grade by 2026, the movement should accelerate by 2025."

Another official pointed out that the current market pessimism often stems from an "ideological" perspective on public finances under the leftist administration of President Luiz Inacio Lula da Silva.

Officials from the Finance Ministry have reiterated Brazil’s commitment to eliminating its primary deficit this year and next, maintaining a margin of 0.25% of gross domestic product (GDP).

Investor concerns have heightened due to recent government measures deemed controversial regarding spending, tax exemptions, and the accounting of new revenues, which have raised doubts about the credibility of the country’s fiscal framework and its debt trajectory.

Brazil’s gross debt has risen by 4.1 percentage points year-to-date, reaching 78.5% of GDP as of August.

On Tuesday, central bank chief Roberto Campos Neto commented that the yield curve’s risk premium appears "exaggerated" compared to peer economies that also struggle to generate primary surpluses.