Brazil’s ’BB/B’ credit ratings affirmed by S&P Global Ratings, outlook stable

Investing.com -- S&P Global Ratings has confirmed its ’BB/B’ long- and short-term foreign and local currency sovereign credit ratings on Brazil on June 5, 2025. The ratings agency also affirmed its ’brAAA’ national scale rating, with both long-term and national scale rating outlooks remaining stable. The transfer and convertibility assessment remains at ’BBB-’.

The stable outlook reflects S&P’s expectation that Brazil will maintain a strong external position, driven by robust commodity exports and the status of the real as an actively traded currency. This outlook is balanced against the country’s fiscal weaknesses, including large fiscal deficits and a high debt burden.

S&P expects Brazil’s large fiscal deficits to continue to drive an increase in net general government debt. At the same time, weaker economic growth due to tight monetary policy is expected to reduce the current account deficit, strengthening Brazil’s external position.

The ratings agency also noted that Brazil’s institutional framework supports pragmatic policymaking, with checks and balances across the executive, legislative, and judicial branches of government. This may lead to initiatives to address its fiscal weaknesses over time.

However, S&P could lower its ratings within the next two years if policy implementation fails to control spending pressure, leading to a faster-than-expected buildup of debt. A deterioration in policy signaling could also impact net foreign direct investment inflows and weaken Brazil’s external position.

On the upside, S&P could raise its ratings over the next two years if policy initiatives increase general government primary surpluses and reduce budgetary rigidities. This could boost expectations for both lower debt and higher growth prospects.

Brazil’s creditworthiness is supported by its strong external position, a flexible exchange-rate and monetary policy regime based on an inflation-targeting framework. The central bank is both statutory and operationally independent. Moreover, deep domestic capital and debt markets enable the sovereign to predominantly fund itself locally and in Brazilian real.

Despite these strengths, Brazil faces large fiscal deficits and a high debt burden, resulting from slow and uneven progress in addressing growth constraints and an inflexible budgetary structure.

Inflation is expected to remain above the central bank’s target until mid-2026, limiting the prospect for less restrictive monetary policy. S&P expects Brazil to run small general government primary deficits over the next few years.

Brazil’s net general government debt is expected to rise to 73% by 2028 from 61% of GDP in 2024. Higher debt and interest rates would result in a significant increase in the general government interest burden. S&P now estimates general government interest will be close to 20% of general government revenue in 2025 and average 17% over 2025-2028.

Despite these challenges, S&P Global Ratings believes Brazil’s strong external position compensates for its weak fiscal profile. The country’s low current account deficits, fully financed by foreign direct investment, and deepening debt and capital markets support its strong external position.

As a relatively closed economy, Brazil is likely to be less vulnerable to global commercial policy volatility. A slowdown in consumption should have a similar effect on imports. As a result, S&P expects Brazil’s current account deficit to be -2.4% in 2025.

Persistent inflation, which started to pick up in May 2024, has remained above the central bank’s tolerance range of 3% +/- 1.5% since September 2024. S&P expects inflation to reach 5.3% at year-end 2025 and fall back into the tolerance range by mid-2026.

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