BRASILIA (Reuters) -S&P Global Ratings upgraded Brazil's long-term ratings to "BB" from "BB-" on Tuesday following the approval of a landmark tax reform, which the agency said reinforced the country's pragmatic track record in recent years.
The upgrade marks a victory for President Luiz Inacio Lula da Silva, positioning Latin America's largest economy just two steps from an investment-grade rating on the S&P scale. A higher rating shows greater creditworthiness, helping countries to issue debt at lower interest rates.
Last week, Brazil's Congress passed a major consumption tax overhaul, seen as a way to boost economic growth, although its effective implementation hinges on subsequent bills and an extended transition period.
After improving its outlook for Brazil in June, S&P has now revised it to "stable" to reflect the country's potential slow progress in addressing fiscal imbalances and its still weak economic prospects. This is balanced by a strong external position and monetary policy that is helping to re-anchor inflation expectations, it added.
Brazil's Finance Ministry welcomed the upgrade in a statement and reaffirmed its commitment to reform.
"(It) will not only contribute to the government's improved fiscal balance, but will also lead to lower interest rates and improved credit conditions, while ensuring price stability," it said.
Lula took office in January facing market skepticism of his leftist agenda and his criticism of the central bank's autonomy and its monetary policy.
However, his administration ultimately held the inflation targets he initially considered too low. Economic growth has also beat expectations, on track for 3% expansion this year, while inflation has cooled significantly.
Congress has approved various Lula measures, including proposals for more revenue to eliminate Brazil's primary deficit next year, even as lawmakers have watered down some of his original bills.
S&P said it expects a "very gradual fiscal correction," with deficits remaining large.
"We expect general government deficits to average 6.2% of GDP over 2023-2026, reflecting the challenges of fulfilling campaign promises, high interest cost, a low level of discretionary spending, and only gradual success on tax measures," it said.
Last week, Fitch affirmed Brazil's "BB" rating and maintained a "stable" outlook.
Brazil received an investment-grade rating for the first time in 2008 but lost it by early 2016 as the global commodity market boom ended and the country faced a series of domestic and international crises.