BRAZIL moved another step closer to investment grade yesterday (Thursday), with a one notch upgrade to Ba1 from Moody’s.
The sovereign now sits a notch below investment grade according to all three main rating agencies, and many are predicting at least one rater will take it all the way before the year is out.
Mauro Leos, a senior analyst at Moody’s, said: "Brazil’s external vulnerability indicators have registered major improvements in recent years and substantially increased international reserves cushion the Brazilian economy against possible external shocks."
Both foreign and local currency bond ratings were upgraded to Ba1. The foreign currency bond ceiling, which also captures the risk of a payments moratorium should the sovereign default, moved up to investment grade Baa3.
The move had been widely expected since Moody’s put Brazil on positive ratings watch in May. External debt spread dropped 10 basis points yesterday according to RBC Capital Markets, with local yields down between five and 15bp.
"Brazilian assets got a relatively mild boost from the upgrade, as it was largely priced in and merely puts Moody’s in line with S&P’s (BB+)," said RBC analysts.
The upgrade gives witness to analysts’ confidence that emerging market sovereigns are in a strong position to ride out the credit crunch. RBC described it as a credibility boost to emerging markets broadly.
"Yes it was expected, but when was the last time you saw a Latin American sovereign upgraded right in the middle of a market correction?" said Guillermo Mondino, head of emerging market strategy at Lehman Brothers.
The rating agency highlighted Brazil’s pro-active debt management. The Treasury bought back $3.4bn in external debt in the first half of the year, taking advantage of market drops to further improve its credit standing.
"The share of fixed-rate domestic debt has increased and the average maturity of domestic debt has lengthened – facilitated by low single-digit inflation and the gradual convergence of inflationary expectations towards the central bank’s targets," said Leos.
However the agency said there was a need for further improvements in public finances, given an upward trend in government expenditure in recent years.
"Therefore, Moody’s sees little upside pressure on Brazil’s ratings and expects the current stable outlook to remain in place for the foreseeable future," according to the ratings statement.
Fitch also has Brazil on a stable ratings outlook, after a May upgrade. Standard & Poor’s, which also upgraded in May, has a positive outlook and may be the first to welcome the country into the investment grade club.