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Lula administration is unlikely to cause credit deterioration, Moody’s says

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Although the government transition brings many question marks about what the fiscal policy and the management of public investment will look like, there are reasons to believe that there will be no substantial changes in the course of the economy, not even in state-owned companies. Marianna Waltz, managing director and head of Latin America ratings at Moody’s Investors Service, cites the composition of Congress, the improved governance of state-run companies in recent years, the spending cap, and the level of capitalization of state-owned banks as factors that mitigate risks. "There are one-off uncertainties, but we don’t see any rupture," she said.Ms. Waltz told Valor that the next administration will have a hard time maintaining fiscal austerity next year, since Brazil’s key interest rate Selic current level, of 13.75% per year, makes the cost of debt very expensive. In addition, the Lula administration will have to gain investors’ confidence despite high inflation and interest rates and slow economic growth - Moody’s expects GDP growth of 0.7% next year.Even so, the credit rating agency’s baseline scenario includes the maintenance of the spending cap as an "effective fiscal instrument" going forward. There may be exceptions, as seen during the pandemic, in the Bolsonaro administration, and the one expected to occur next year, when definitions of Brazil’s largest cash-transfer program will require exceptional spending, above the limit of the previous year’s inflation. But as long as such exceptions do not become the rule, a one-time non-compliance would not put Brazil’s rating, today at Ba2, at risk. "The next step [of the elected government] is to announce an economic team that corroborates the commitment to fiscal discipline," she said.How the next administration will run Petrobras is another source of uncertainty - which is why the oil company is down almost 9% in November. Ms. Waltz acknowledged that the company is vulnerable to political interference, but believes that the Law of State-owned Companies protects Petrobras by limiting government action.Moreover, the backdrop of oil, which is seen as stabilizing next year, can also reduce the pressure for a change in the company’s pricing policy. "We foresee stable oil...

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