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Brazil’s upgrade prompts scepticism

A commodity boom masks fundamental problems in the Brazilian economy, observers argue.

Sooner than expected, and in the wake of Peru’s sovereign rating upgrade, Brazil finally got what it wanted last month – investment-grade status. Persistent lobbying by the government and perpetual optimism from the bankers seems to have had the appropriate effect. But not long after corks were popped to celebrate, the champagne had begun to go flat. Sceptics doubt whether this new status has been earned.

The top issues on Brazil’s economic agenda are tax reform, currency appreciation and inflation. Energy shortages and access to credit are next on the list. As foreign direct investment continues to flow in at record levels, and the dollar continues to weaken, so the real continues to appreciate. By mid-May, following Brazil’s upgrade, the real had reached a new high against the dollar of R$1.64/$ – a move that clearly shows that the new 1.5% tax measures, which the president placed on all currency trades in March, in order to make the real more competitive, have been less than effective.

In terms of fiscal reform, the worried analysts are succinct – this upgrade masks the underlying tax system problems, they say. Brazilians have a tax burden that is comparable to that of the average EU taxpayer – 45% of GDP.