Mind-Blowing Economic Turnaround? Experts Finally Hopeful as Brazil Receives Incredible Boost from S&P!

Stealing the limelight in the final stretch of this Wednesday’s session (14th), the rise in the perspective of Brazil’s sovereign rating (still maintained at BB-) by S&P Global from flat to positive gave the impetus to Ibovespa rose almost 2% and exceeded 119 thousand points, while the dollar fell to BRL 4.80.

It was the first positive move the agency made on Brazil’s ratings since 2019. As highlighted in the chart below, prepared by XP and bringing historical data from 1996 to today, of the 7 times S&P placed an upward bias about the brazilian rating, in 6 the rating was really high. The exception was precisely in the most recent one, in December 2019.

The positive perspective reflects signs, in the agency’s opinion, of greater certainty in relation to the stability of fiscal and monetary policies, together with the forecast of continuous growth of the GDP – Gross Domestic Product – although at a low level. These factors could result in a lower debt burden for the country, as well as reinforce Brazil’s institutional resilience, with stable policies and a balance between the Executive, Legislative and Judicial branches.

The rating affirmation reflects, from S&P Global’s point of view, Brazil’s strong external position, flexible exchange rate policy, and inflation-targeting monetary policy regime, led by an autonomous Central Bank, among others.

When rating agencies position outlooks in a positive trend, this indicates a possibility of upgrading within a given time horizon. As S&P Global indicated, for a possible upgrade of the Brazilian credit rating in the next two years, Brazilian institutions should implement pragmatic economic policies with the intention of containing vulnerabilities in public accounts and setting the stage for better economic growth. The key to this would be the approval of additional reforms, including a possible tax reform currently under discussion.

The outlook could be revised back to ‘stable’ within the next two years if an inadequate policy framework or poor implementation results in limited growth, leading to further fiscal deterioration and higher-than-expected debt. In this sense, the agency believes that a deterioration in the signaling of the policy could also affect foreign investment flows and weaken the strong external position.

it should be noted that Finance Minister Fernando Haddad took advantage of the announcement to ask the Central Bank to reduce the Selic rate, currently at 13.75%. The Monetary Policy Committee (Copom) meets next week.

“I think that the harmony between the Powers has contributed to the results. The BC is yet to join this effort, but I want to believe that we are about to see that happen,” Haddad said. “I believe in the harmony between fiscal and monetary policies. Now everything competes so that this harmonization occurs faster than expected. Six months ago no one would have said that we would be in this situation. We have a golden opportunity,” he said.

The upgrade of the rating outlook sparked discussions. After all, was it a hasty decision? And what does this mean for the market?

For Alberto Ramos, director of economic studies for Latin America at Goldman Sachs, the news is positive, although somewhat unexpected, since the new fiscal framework has not yet been approved and the prospects and final content of the tax reform are still uncertain.

“In addition, there has been a clear deterioration in the microeconomic policies and regulatory environment in recent months,” says Alberto Ramos, director of economic research for Latin America at Goldman Sachs.

Ramos believes that moving up the ratings scale and eventually regaining investment-grade status would require decisive reforms and macro, micro, and regulatory policies that support investment and promote productivity growth (i.e., increase the modest real growth potential current GDP) and stabilize the dynamics. debt.

“In our assessment, outside of monetary policy, the current mix of macro and micro policies and the prospects for reforms are still significantly below this standard,” he says.

Carla Argenta, chief economist at CM Capital, assesses that the change takes into account some points: 1) signs of certainty about fiscal and monetary policies; 2) GDP and positive fiscal framework, recently approved by the Chamber of Deputies and now under the auspices of the Senate; 3) measures implemented in recent years as essential to contain the spread of risks to the stability of Brazil and 4) minimized risk of reversal of positive measures.

Carla reinforces that all the points mentioned as fundamental for the change in perspective of the rating are related to structural changes carried out in recent years. Uncertainty about monetary policy could only be reduced thanks to the approval of the autonomy of the monetary authority, formally granted in February 2021. The New Fiscal Rule (NRF) is underway in the Senate and should meet little resistance for its approval. Its guidelines were well received by economic agents for two reasons: they reduce uncertainty about future government spending and their design is in line with what is prescribed by the main international organizations at this time, such as the IMF’s own manuals.

“The set of factors expressed above allows us to make an affirmation: S&P’s decision was not made based on conjunctural movements, but with structural guidelines, which, regardless of the period of the economic cycle, tend to be maintained (or change little ), and bring clarity on the future steps of the country in what refers to the economic field”, he evaluates.

On the other hand, despite the improvement in the outlook, several factors, equally structural, were cited as limiting the continuous improvement in Brazil’s rating, especially the national dynamics between the powers, which, in the agency’s evaluation, slow down the evolution of fundamentals. reforms for a safer and more prosperous environment.

The economist recalls that the positive perspective was already withdrawn from Brazil at another time. “Continuous work is needed, with positive results in the short term, especially with regard to the evolution of public accounts, so that this does not happen again. The economic situation may make this path smoother or more complicated, but it is in no way responsible for further changes in ratings, ”he concludes.

earnings catalyst

Despite the cautionary talk, the S&P announcement is seen as another positive catalyst to unlock the Brazilian market.

This was also immediately reflected in the currency and interest futures market. “After a positive action (rating or outlook), it is generally possible to expect a relief in interest rate expectations, with the closing of the DI curve. In fact, that is what already happened this afternoon of the 14th, with the dollar falling 1.15% to R$ 4.80 and interest falling mainly in the medium and long terms (reflecting the fiscal risk)”, highlights XP in the report. With minimums in eight of the nine sessions in June, the dollar accumulated a devaluation of 5.25% in the month.

After the close of the spot market, the dollar futures for July accelerated their downward pace and also reached new lows, with a significant rotation, above US$ 16 billion – which suggests relevant changes in the positions of the investors and may open space for a greater appreciation of the real.

“Brazil is very well positioned among emerging countries. And S&P’s decision is in that line. The real tends to appreciate more”, Banco Pine’s chief economist, Cristiano Oliveira, told the Issue, recalling that the Brazilian currency is still depreciated in real terms compared to other emerging countries.

Oliveira points out that the country’s risk measures were already improving. Brazil’s 5-year CDS (Credit Default Swap), a kind of debt default insurance, had fallen below 200 points, something not seen since the second half of 2021. There was also a significant drop in the implied volatility of the real, which this week reached its lowest level since 2019.

“We should see an increase in flow in the coming months, be it commercial or financial. Even with the likely fall in the Selic, real interest rates will remain high. And Brazil offers an opportunity for direct investment, as it will grow more than expected,” says Pine’s chief economist.

Guide reinforces the view that a possible change in the sovereign risk rating is a very important point for external flows. “That’s why we saw the dollar hit session lows after the announcement,” she assesses.

(with Estadão content)

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