Higher, sustainable growth rates will play a major role in improving Brazil's credit profile, but economic advancement in the country could be stifled in the coming years by the absence of reforms and fiscal consolidation efforts, Moody's said in a report.
Since recovering from the 2014-2016 recession, Brazil has seen underwhelming growth due to structural impediments, including low domestic savings and investment, material infrastructure bottlenecks and a complex tax regime, Moody's said. The rating agency now estimates that Brazil's economy will grow 0.9% in 2019 and 2.0% in 2020.
The rating agency expects improved economic performance to have a bigger impact on Brazil's debt burden than an interest rate cut. "Persistently weak economic growth will therefore limit the upside potential for Brazil's credit profile," it noted.
However, successful implementation of key reforms being taken by the administration of President Jair Bolsonaro could improve medium-term growth over Moody's 2%-to-2.5% forecasts for the next three years, the rating agency said. Bolsonaro's reform agenda includes financial sector reforms to improve credit allocation, a tax reform that will reduce the cost of business, and a privatization and concessions program.
According to Moody's Vice President and Senior Analyst Samar Maziad, Brazil's return to investment grade will still take a couple of years, Valor Econômico reported.
The approval of the pension reform would not trigger an improvement in the country's sovereign rating but rather is key to maintaining its current status, Maziad said. Besides the reform agenda, economic growth and an improved fiscal situation would support a rating hike, the analyst said.
Political risk in the country has lessened as investors focus more on reforms and the economy's competitiveness, Maziad noted.
