UPDATE 2-Moody's to decide on Brazil upgrade by year-end
* Moody's Leos sees lower rates important driver
* Sees government finances as a weakness for ratings
* Country faces relevant mid-term challenges
By Guillermo Parra-Bernal
SAO PAULO, Oct 4 (Reuters) - Moody's Investors Service will discuss any potential change to Brazil's sovereign investment-grade ratings before year-end, Mauro Leos, senior credit officer for the ratings company, said on Thursday.
Currently Moody's rates Brazil "Baa2" and has a positive outlook on the rating, meaning that it is more likely to be upgraded in the short run. In the medium term, the discussion will center on whether Brazil belongs to the group of "A-rated" countries such as Chile and China, he added.
"The question we will answer when we sit down in a few weeks to decide this is: Do we want ratings to stay where they are or shall we move up to the next level, " Leos told reporters at a Moody's event in Sao Paulo.
The analyst said one reservation to upgrading the rating remains the fact that Brazil's debt-servicing to revenue ratio is the highest among countries with comparable ratings.
He also said the biggest structural change in Brazil has been a recent decline in interest rates to record lows.
According to Leos, the dramatic drop in borrowing costs over the past four years will certainly improve the risk perception that markets have about Brazil. "This new element of lower interest rates will help slash the debt servicing bill for the government, and that's important," he added.
The central bank cut interest rates nine straight times since mid-2011 to an all-time low of 7.5 percent, as part of president Dilma Rousseff's efforts to revive the economy. Brazil, Latin America's largest economy, has been spinning its wheels in the past few quarters, but analysts expect growth to recover gradually through the next year.
The main drivers for a Brazil upgrade include fiscal responsibility, economic strength and policy response, Leos said. The administration of President Dilma Rousseff has shown interest in establishing more predictable and clearer fiscal rules in Brazil, a country where fiscal institutions are weaker than in similar or higher-rated peers.
When asked whether the probability for an upgrade is higher now, Leos said that "despite things going wrong here and there and these past 12 months being tough all around the world, we kept our rating and a positive outlook on Brazil for all this period."
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