April 9, 2018 / 9:22 PM / 9 months ago

UPDATE 2-Moody's revises Brazil outlook to stable, citing spending cuts

(Adds Brazil finance ministry comment)

BRASILIA, April 9 (Reuters) - Ratings agency Moody’s Investors Service on Monday revised the outlook for Brazil’s sovereign rating from negative to stable, in a vote of confidence that the winner of this year’s elections will deliver an unpopular agenda of cuts to government spending.

In a statement, Moody’s analysts said faster-than-expected economic growth was also likely to support austerity efforts, which have failed to bring the government’s debt metrics to levels consistent with similar-rated peers.

“Moody’s expects the incoming administration to resume efforts to approve further reforms that will be needed, in particular to social security, to comply with the constitutionally-mandated spending ceiling,” the statement said.

The more optimistic tone came just days after the imprisonment of former President Luiz Inacio Lula da Silva, who has railed against the government’s belt-tightening efforts and leads polling ahead of an October presidential vote.

Lula turned himself in to police on Saturday to begin serving a 12-year sentence for a bribery conviction, impeding his efforts to return to power.

Brazil’s Finance Ministry attributed the improvement in Moody’s outlook to belt tightening led by the government’s economic team in the last two years and said the debate on structural changes needs to evolve.

The ministry “reaffirms its commitment to fiscal consolidation and recuperation of economic activity and jobs,” it said in a statement.

Brazilian markets fell on Monday as traders feared Lula supporters could still turn to an anti-austerity candidate in a wide-open field of candidates, many of whom are appealing to voters’ anger after a painful downturn and sweeping corruption scandal.

But Moody’s cited a consensus among political leaders about the costs of abandoning fiscal responsibility, particularly due to a constitutional amendment limiting growth of public spending passed by President Michel Temer’s administration.

Moody’s kept Brazil’s rating at Ba2, two notches below investment-grade status. Faster-than-expected fiscal changes could spur an upgrade, while “a re-emergence of political dysfunction” or “stalled reform momentum” may trigger a downgrade, Moody’s said. (Reporting by Bruno Federowski and Jake Spring; editing by Diane Craft and Rosalba O’Brien)

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