S&P Global Ratings on Tuesday raised Brazil’s long-term global scale rating from BB- to BB, still in junk territory, following the recent approval of a major tax reform.
The House approved an overhaul of Brazil’s tax code last Friday, which is expected to become law on December 20.
The reform will radically simplify Brazil’s consumption tax system by introducing two VAT-like levies, as well as removing the power of state governments to selectively reduce taxes on certain products — in the so-called “fiscal war.”
“While it will be implemented gradually, the reform is a significant overhaul of the tax system and will likely translate into productivity gains over the long term,” said S&P in a statement.
“The reform is structural, and a simpler tax code will translate into productivity gains, but most likely in the long term,” the report adds. “The missing component has been the lack of progress to address the large, rigid, and inefficient spending of the Brazilian general government.”
“The stable outlook reflects our expectation that Brazil will maintain a strong external position, thanks to strong commodity output and limited external financing needs,” the report says. “We expect a very gradual fiscal correction but anticipate fiscal deficits will remain large.”
S&P expects the Brazilian economy to grow at almost 3 percent in 2023, and to slow toward 1.5 percent in 2024.
Ratings agency Fitch upgraded Brazil’s credit rating from BB- to BB back in July. Last week, it reaffirmed Brazil’s grade and stable outlook.
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