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One of the three main international credit evaluation agencies – Fitch – announced on Monday 4th April that it has raised its risk classification of Brazil to a level higher from ‘BBB -‘ to ‘BBB’.  The organisation stated that the sustainable growth potential is supported by medium term fiscal policies; the strengthening of liquidity levels despite the global economic slowdown; the steady reduction of treasury loans to the BNDES (the Brazilian Development Bank) and the increase in the capacity of the country to be able to handle economic shocks.

The agency also stated that the election of Dilma Rousseff has been a smooth transition and there is an expectation that prudent macro-economic decision making will continue.  The country is now amongst the strongest net sovereign external creditors in the BBB category and the agency pointed to the likelihood of robust inflows of foreign direct investment being apparent due to the deterioration of net external debt levels (although current account deficits are likely to remain high).

The move puts Brazil a level higher on what is classified as being of an ‘average quality degree of investment’ (in line with Mexico and Russia).  According to agency regulations, the rating translates to mean that financial commitments such as interest payments, principal loan obligations, insurance claims and/or counterparty financial agreements are being met comfortably.

Finance Minister Guido Mantega welcomed the decision stating: ‘the rises are a recognition that the Brazilian economy is becoming more solid.’   When questioned by the Globo newspaper of  whether this will increase the inflow of US dollars which he has recently been taking steps to control (due to negatively affecting the competitiveness of Brazilian exports), he responded with: ‘it is better to have an excess of dollars than a lack of the currency – a problem which we had in the past.’

Alexandre Tombini, president of Brazil’s Central Bank was also positive about the decision stating that the revision reflected the ‘good fundamentals of the economy’ but went on to indicate that ‘this will not deter the decision to pursue an environment of monetary stability and financial solidification.’

Some commentators nevertheless have stated the move as overly optimistic – with the main concern being with regards to the fight against inflation. In an interview with the FT, Douglas Smith, head of Latin American research at Standard Chartered stated: ‘I’m not convinced by some of Fitch’s logic. Brazil’s debt is still very high and not really falling.  Its budget is quite rigid because you have a lot of social programmes which you can’t take back that easily. They will have to resort to tax increases; they’re not going to get there just through budget cuts.’

The two other agencies are yet to confirm whether they will be following suit.  The Brazilian Standard’s & Poor analyst Sebastián Briozzo stating: ‘since the previous raise, Brazil has evolved in some areas yet receded in others. Fiscal control has not progressed to the point of us being able to raise our rating just yet’.  Moody’s stated it will be reviewing the country’s rating in the second quarter and indicated positive signs.