On his recent trip to New York, President Lula asked to accompany Minister Fernando Haddad to a meeting with the credit rating agencies.

“I called the rating agencies because it is important that they hear from the President of the Republic what is happening in the country,” Lula told journalists. “They don’t just need to listen to the businessmen. Listen to the workers and the President of the Republic.”

The lobbying worked.

This afternoon, Moody’s upgraded Brazil’s credit rating and left the country on the brink of regaining investment grade.

The agency raised the sovereign rating from Ba2 to Ba1, just one notch below investment grade on its scale.

The outlook is “positive,” indicating that the most likely next move is another improvement in the rating.

According to Moody’s, the upgrade is due to the improvement in credit quality, thanks to the stronger economic growth – which favors the debt dynamics – and fiscal reforms.

However, the agency noted that the “credibility of the fiscal framework is still moderate, as reflected in the high cost of debt.”

“The positive outlook reflects the possibility that stable economic growth and compliance with the fiscal framework will help strengthen institutional credibility and reduce debt costs more significantly than expected,” said the agency.

According to Moody’s, the cost reduction will have a positive impact on the debt trajectory, “especially combined with stronger economic growth than forecasted, allowing for a decrease in debt in the medium term.”

Now, Moody’s, which was more conservative regarding Brazil until last year, is more optimistic than the other two main rating agencies. Standard & Poor’s and Fitch rate the country as BB, two levels below investment grade, with a stable outlook for both.

The news caught Faria Lima and Leblon managers by surprise; an upgrade seemed unlikely with debt levels on the rise.

“It was surprising to me,” said Carlos Kawall, former Treasury Secretary and founder of Oriz Partners, to Brazil Journal.

The economist acknowledged that the performance of GDP above expectations in recent years could indeed favor the debt trajectory. Rising revenues also contribute to a possible improvement in debt dynamics.

However, Kawall believes these positive effects could be short-term due to public spending rigidity and indexation of education and health expenses, as well as real increases in the minimum wage.

“I understand that Moody’s view of fiscal risks was lenient,” said Kawall. “I have a more conservative vision. We are not seeing a reduction in debt, on the contrary, and the cost of debt has risen compared to the beginning of the government.”

According to Kawall, the stronger GDP growth and the “exuberance” in revenues are not aligning with the framework. “There doesn’t seem to be a picture of fiscal consolidation ahead.”

According to an executive from a foreign bank, “Moody’s rationale didn’t convince anyone I spoke with.”

But for Master’s Chief Economist Paulo Gala, the upgrade was “reasonable” because the country is doing well compared to its peers.

“Given the context, what Moody’s is saying is that Brazil manages fiscal issues well, although still relatively fragile,” he commented. “There is indeed fiscal pressure, the government is spending a lot. There is difficulty in reaching the primary deficit target.”

In his assessment, the major positive news was the return of stronger economic growth.

“With 3% annual growth, everything becomes easier,” Gala said.

There is skepticism among managers about the possibility of regaining investment grade before the end of Lula’s government, but Haddad said today that he is working towards that goal.

For the minister, it is not a “given” and “we have work to do, but it is a concrete possibility.”

“If we continue to persevere in this path adjusting fiscal and monetary policies, we have a great chance of achieving stability in the debt/GDP ratio,” said Haddad.

Moody’s evaluation acknowledges recent advancements by successive Brazilian governments, “despite the polarized political environment.” The agency cited the tax reform, which “should contribute to increasing potential GDP.”

Economist Solange Srour, from UBS Wealth Management, was among those surprised by the upgrade and believes that the debt trajectory is still a concern.

“A country that needs to finance a debt of about 80% of GDP at real interest rates of 6.5% cannot afford to think that debt growth doesn’t matter,” she said. “If investors do not see a stabilization horizon, they will continue to demand higher premiums.”


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