Ratings agency Moody's Investors Service upgraded Brazil's sovereign credit rating on Monday, giving a vote of confidence in the government's efforts to prevent Latin America's largest economy from overheating.
Moody's lifted Brazil a notch further into investment grade status to BAA2 and retained its positive outlook. The action underlined the resilience of Brazil's economy when some crisis-hit countries in Europe are suffering downgrades.
Brazilian stocks and the currency gained slightly after Moody's announcement, which followed a one-notch upgrade to Triple B by ratings firm Fitch in April. The Standard and Poor's agency in May raised its outlook to positive on its Triple B-minus rating, the lowest rung of its investment-grade ratings.
"Through a combination of fiscal and monetary measures, the authorities are in the process of defusing conditions that have caused overheating in the economy," Moody's said.
Even if a "bubble-like event" were to occur, it said, "its impact on the government's balance sheet is not likely to be substantial."
Brazil's central bank has raised interest rates four times this year and taken other steps to curb strong credit growth in Brazil, whose economy grew at a torrid 7.5-per-cent pace last year.
President Dilma Rousseff announced budget cuts of more than $30-billion (U.S.) to counter a surge in public spending last year that helped stoke inflation to a 6.55-per-cent annual rate.
Mauro Leos, Moody's Brazil analyst, said the agency had maintained its positive rating because there was scope for more improvement in the fiscal accounts in the coming months.
"There is still a lot that needs to be done on the Brazil fiscal side. We would like to see … the fiscal results to be better during booming times," he said.
"If that were to be the case, that would allow Brazil eventually to go higher in the BAA category and possibly into an A rating down the road."
Brazilian default risk as measured by the JPMorgan EMBI+ index of emerging market debt fell. Investors now require 1.74 percentage points of yield more to buy a Brazilian bond than a comparable U.S. Treasury, five basis points less than on Friday.
Moody's also said that the Brazilian banking system appeared sturdy enough to weather any potential credit shocks. Concerns about a credit bust in Brazil have grown as consumers have gone on a debt-fuelled spending spree in recent years and are now facing sharply higher interest rates.
Banks' high capital ratios provide "a sturdy first-line-of-defence against any such event," significantly reducing the need for government financial support, Moody's said.
The rating agency said that Brazil's low credit-to-GDP ratio implies that, compared to European countries that experienced credit bubbles, "the potential magnitude of a systemic credit event would be considerably smaller."