An improvement in Brazil’s sovereign credit rating hinges more on stronger economic growth than lower interest rates, rating agency Moody’s said on Tuesday, urging economic reform and the shoring up of public finances.
Brazil’s central bank has slashed interest rates by 100 basis points to a new low of 5.50% and seems set to cut again, and the government is trying to implement a radical agenda of pension and tax reform, privatization and deregulation.
But blighted by persistently high unemployment, excess capacity and weak investment, the economy is still struggling to grow.
“Higher economic growth would have a more pronounced impact on the debt burden than a reduction in interest rates going forward. Persistently weak economic growth will therefore limit the upside potential for Brazil’s credit profile,” Moody’s said in a report on Tuesday.
“Absent growth-enhancing reforms that improve productivity and competitiveness, and absent an acceleration in fiscal consolidation efforts, Brazil’s overall credit profile is unlikely to see material improvements in the coming years,” Moody’s said.
Moody’s rating on Brazil’s sovereign debt is Ba2, which is non-investment grade. The outlook is stable.
Brazil’s economy grew by 1.1% in each of the last two years, a sub-par recovery from a devastating recession in 2015-16, economists say. Growth is set to slow to around 0.8% this year, according to government, central bank and IMF estimates.
Brazil’s conservative government has adopted a tough approach to spending in an effort to bring down the deficit and overall debt burden.
The effort includes a spending cap to limit growth in public expenditures at the previous year’s rate of inflation; a primary deficit target this year of 139 billion reais (US$ 33.3 billion); and a ‘golden rule’ barring debt issuance to cover current spending.
“Higher economic growth would have a more pronounced impact on the debt burden than a reduction in interest rates going forward”, said Moody's report