Moody’s has announced the upgrade of Brazilian sovereign rating to Baa2 with maintenance of the positive outlook

As of June 20th 2011, Brazilian sovereign credit rating was upgraded from Baa3 to Baa2, the second notch in Moody’s investment grade level. It’s worth mentioning that the positive outlook was maintained.

In its press release, Moody’s highlighted the following aspects:

• “High economic strength that reflects the large size of the economy and a relatively high degree of diversification of the economic and export bases”;
• “Evidence of policy continuity”;
• “Government debt structure associated with moderate exchange rate, rollover and interest rate risks”;
• “Brazil’s susceptibility to financial event risk to be moderate and consistent with current ratings”;
• Expectation that “government debt ratios will report a declining trend as compliance with the fiscal targets incorporated in the medium-term budgetary guidelines is likely to be observed”;
• Expectation is for “relatively favorable and more sustained economic growth in coming years”.

On the other hand, the agency cited “the evidence of rapid credit growth, increased inflationary pressures and signs of overheating” as a counterbalance to Brazil’s credit attributes. However, in Moody’s opinion, “recent policy efforts to ward off these conditions have, to date, been effective in mitigating potential credit risks and policymakers appear strongly committed to containing their potential adverse impact with additional measures”.

Besides, the operation of Brazil’s credit market with respect to other countries makes it less risky to government’s balance sheet. That is because there is “total absence of foreign currency-denominated loans in Brazil”, “predominance of fixed-rate consumer loans” and small size of mortgage lending (less than 5% of GDP). Moreover, high bank capital ratios (Basel ratios) together with a low credit-to-GDP ratio imply that the “potential magnitude of a systemic credit event would be considerably smaller”.

Finally, “the positive outlook assigned to Brazil’s Baa2 ratings captures the possibility of a further upgrade within the next 12-18 months. This would be possible if economic growth moderates and remains at a lower-but-more-sustainable rate, and if the authorities are simultaneously willing and able to comply with medium-term budgetary targets”.

Source: Moody’s

Check here the agency’s full report.