Fitch upgrades Brazil’s debt

Fitch has given the thumbs up to Brazil’s new president Dilma Rousseff and her efforts to rein in spending, becoming the first big rating agency to upgrade the country’s debt one more notch into investment grade territory.

The agency said on Monday it had lifted the rating on Brazil’s local and foreign currency debt to BBB from BBB-, and its country ceiling to BBB+ from BBB. However, some economists labelled the move as too optimistic, arguing that the country will have to do more to fight inflation.

Brazil’s economy grew at one of the fastest rates in the world last year as the government poured money into the country in the wake of the financial crisis, raising concerns over rising prices and possible credit bubbles.

But since taking over this year, Ms Rousseff and her administration have attempted to slow the country’s growth to a more sustainable level, introducing a series of credit measures and revising down the budget by R$50bn.

“The Rousseff administration has displayed signs of greater fiscal restraint, which coupled with healthy growth prospects should allow for a fall in Brazil’s heavy general government debt burden,” the rating agency said in the accompanying statement.

Standard & Poor’s still has Brazil at BBB- status but Moody’s has indicated it may bump up the Latin American country before the summer.

Although the other rating agencies will have to follow suit soon, it will be difficult for Brazil to achieve a higher grade than BBB, said Douglas Smith, head of Latin American research at Standard Chartered.

“I’m not convinced by some of Fitch’s logic. Brazil’s debt is still very high and it’s not really falling,” he said. “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.”

Fitch also praised Brazil’s new government for keeping a lid on the minimum wage and steadily reducing the treasury’s loans to the BNDES, Brazil’s national development bank.

But many investors would like to see an even bigger reduction in the role of the BNDES, which lent out three times more than the World Bank last year. This is particularly important as the country tries to lure private investment in preparation to host the World Cup in 2014 and the Olympics two years later.