Following S&P, Fitch upgraded Brazilian sovereign rating to the investment grade level from BB+ to BBB- with outlook stable. The significant improvement of Brazil external and fiscal accounts was mentioned as the leading reason for the upgrade. The credit agency mentioned the remarkable pace of international reserves accumulation and the fact that the public sector is already net creditor in dollars. The authorities have established a track record of commitment to low inflation and a primary budget surplus that has dispelled previous concerns over medium-term fiscal sustainability.
Fitch dismissed the idea that ‘good luck’ explained by high commodity prices justified Brazil’s improvements. While one cannot fully dismiss such factor the improvement is mainly due to good policy management. Nowadays Brazil much is more resilient to global financial shocks due to the credibility of its macroeconomic policy framework.
Macroeconomic policy in Brazil has gained credibility. Besides, the improved structure of public debt has reduced the 'fiscal dominance' of monetary policy decisions by largely eliminating the vulnerability of the public sector's balance sheet to exchange rate shocks, underpinning the credibility of the inflation target and the central bank's policy freedom. The central bank has not hesitated in recently raising policy interest rates in order to fight inflation and to anchor inflation expectations. Moreover, the government continues to demonstrate fiscal discipline by restating its primary surplus target of 3.8% of GDP even after the loss of 1.5% of GDP in revenue as a result of the failure of Congress to renew the CPMF (financial transaction tax) in December 2007. The fiscal results of the first four months of 2008 suggest that the government will comfortably meet its primary surplus target for this year.
However, there are still structural weaknesses that should be address in the future such as, the high level of gross public debt (current at 57% of GDP against the BBB average of 28%), the still unfavorable public debt profile (even if it is improving) and the lack of structural reforms in the country.