Moody’s cuts Petrobras outlook, changes Brazil’s credit rating

WHAT Brazil’s government may try to raise money from oil licences, oil taxes

WHY Brazil faces a fiscal gap

WHAT NEXT Oil producers’ margins could tighten

Brazil’s government is seeking to raise $6.2bn from the oil sector over the next two years to help meet fiscal targets, the energy ministry said, Bloomberg reported.

The proposal, presented to President Luiz Inácio Lula da Silva by Mines and Energy Minister Alexandre Silveira, includes selling oil exploration licences and reviewing reference prices used to calculate oil taxes.

The plan offers an alternative to raising taxes on financial transactions. However, analysts warn that revising reference prices could reduce margins for producers and discourage investment.

“These are heavy measures that could cause more problems in the medium- and long-term,” said energy consultant Marcelo de Assis.

The ministry is urging the oil regulator ANP to complete the price review before the end of July. If approved, the licence sales could raise up to BRL15bn ($2.65bn) this year, covering areas near existing pre-salt fields such as Tupi, Mero and Atapu.

A separate move to access Brazil’s oil fund, worth $3.5bn, has been deemed insufficient to address the fiscal gap.

Moody’s

This comes as Moody’s has revised Petrobras’ global credit rating outlook from positive to stable, following a similar change to Brazil’s sovereign outlook, the company said in a press release.

The agency reaffirmed the national oil company’s credit rating at “Ba1”. In a report, analysts Erick Rodrigues and Marcos Schmidt said the adjustment reflects Moody’s recent update to Brazil’s sovereign profile on May 30, which maintained the “Ba1” rating, but shifted the outlook to stable.

Petrobras’ “Ba1” rating and its standalone “ba1” base credit assessment remain unchanged. According to Moody’s, these continue to reflect the company’s sound credit metrics and consistent operational and financial performance.

“Despite being a government-linked company, Petrobras’ probability of default due to sovereign credit difficulties is considered low,” the agency noted, citing “robust capital structure, low dependence on domestic financing, limited exchange rate exposure and a significant share of revenues from exports”.

The agency added that Petrobras’ stable outlook indicates expectations that its credit fundamentals will remain steady over the next 12 to 18 months.

Brazil’s debt affordability has been deteriorating and progress on fiscal reforms has proved slower than expected, clouding the sovereign credit outlook, Moody’s has said a few days earlier.

Brazil’s credit rating

The agency changed Brazil's credit rating outlook from positive to stable, but also affirmed the country's “Ba1” long-term local and foreign currency issuer ratings.

The outlook change reflects "a tapering of upside credit risks in light of a pronounced deterioration in debt affordability and slower-than-expected progress in addressing spending rigidity and building credibility around fiscal policy," despite adherence to primary balance targets.

Moody's said the government's ability to materially reduce fiscal vulnerabilities and stabilise debt burden remains constrained by spending rigidity and rising borrowing costs, offsetting upside investment potential and economic reforms.

The agency now expects Brazil's debt burden to stabilise around 88% of GDP over the next five years, up from 82% projected in October 2024, driven by larger-than-expected interest payments.

The interest-to-revenue ratio is estimated to peak near 21% in 2025, up from around 15% in 2023.

Debt structure

Brazil's debt structure is highly sensitive to interest rate movements, with the central bank raising the benchmark Selic rate to 14.75% amid rising inflation expectations. The Selic rate is the reference interest rate for Brazil’s economy.

The rating agency said deeper reforms – including reducing revenue earmarking and de-linking social benefits from minimum wage increases – would be needed to address spending rigidity meaningfully.

Building consensus around such reforms would require coordination between government, Congress and the public, likely taking considerable time.

“Over the past three years, Brazil's real GDP growth has remained strong around 3%, and the government has met its primary deficit targets as expected. However, a material increase in inflation and inflation expectations in the context of strong economic activity led the central bank to resume forceful monetary policy tightening,” said Moody’s.

“As the government debt structure is very sensitive to interest rate movement, interest payments will increase materially and lead to larger overall fiscal deficits and debt accumulation in 2025-2026 than we previously expected. Market concerns over the direction of fiscal policy have also contributed to the rise in inflation expectations and risk premium on government debt.”

This comes after last week’s statistics office IBGE report indicating that Brazil's economy expanded 1.4% in the first quarter as a record soybean harvest drove agricultural output up 12.2%. The quarterly growth marked the 17th consecutive quarter of positive year-on-year expansion at 2.9%.

Agriculture, representing 6.5% of GDP, led the surge with favourable weather conditions boosting soybean production 13.3% and corn 11.8%. Services, accounting for 70% of the economy, posted modest 0.3% growth while industry declined 0.1%.

Despite industrial weakness, São Paulo's influential Fiesp trade group upgraded its 2025 growth forecast to 2.4% from 2.0%, citing expected government stimulus measures and continued investment growth to offset monetary policy headwinds.

Brazil's labour market showed resilience with 257,528 formal jobs added in April – the best performance since 2020 – bringing total job creation to 922,000 positions through the first four months. The employment gains occurred across all 27 states and economic sectors despite elevated interest rates.

The economy generated BRL3.0 trillion ($524bn) in current values during the quarter, with household consumption up 1.0% and gross fixed capital formation surging 3.1%, signalling robust investment activity.