RIO DE JANEIRO (Reuters) - Moody's Investors Service upgraded Brazil's sovereign credit rating on Monday, giving a vote of confidence to 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, underlining the resilience of its economy compared to some European countries that are suffering debt crises and rating downgrades.
The agency said Brazil's policies had successfully dampened overheating pressures that threatened to derail the economy after torrid growth of 7.5 percent last year. It also said the South American nation was less vulnerable to credit risks than many others because of its solid banking system.
Brazil's central bank has raised interest rates four times this year to 12.25 percent and taken other steps to curb strong credit growth and inflation that is running at an annual pace of 6.55 percent.
Still, some analysts questioned whether Brazil had done enough to deserve the upgrade, its second of the year after Fitch upped its rating in April. President Dilma Rousseff announced budget cuts of more than $30 billion this year but stopped short of bolder cuts to the bureaucracy and public employee benefits that economists have long recommended.
John Welch, emerging markets strategist with Macquarie Capital in New York, said he was "perplexed" by the timing of the upgrade given that Brazil's fiscal situation has only improved marginally after an election-year spending surge in 2010.
"I do not think that Brazil has improved as a credit," he said. "So I suppose it is a catch-up."
Kathryn Rooney Vera, senior emerging markets strategist at Bulltick Capital Markets, said Moody's move was a "bit premature." given Rousseff's relatively timid spending cuts.
Brazil's real reversed losses after Moody's announcement and traded 0.1 percent firmer at to 1.593 reais to the dollar in afternoon trade.
Brazil first won investment grade status in 2008 after years of solid growth and fiscal discipline, banishing its reputation as a crisis-prone basket case.
On Moody's ratings, Brazil is now one notch above India and Ireland. In another sign of improving economic stability in Latin America, Moody's awarded Colombia its second investment-grade rating in two months in May.
"I think investors realize that in terms of returns and in terms of GDP ratios and fiscal balances, many emerging market countries are doing better than the developed world," said Clyde Wardle, emerging markets FX strategist with HSBC in New York. "There is a lot to continue supporting Brazil."
Alexandre Tombini, Brazil's central bank chief, said Moody's decision was a recognition of the "effectiveness of the current economic policy in keeping and consolidating stability."
Mauro Leos, Moody's Brazil analyst, said the agency had maintained its positive outlook because there was scope for more improvement in the fiscal accounts in the coming year.
"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."
Moody's said the Brazilian banking system appeared resilient enough to weather any potential credit shocks. Concerns about a credit bust in Brazil have grown as consumers have gone on a debt-fueled spending spree in recent years and are now facing sharply higher interest rates.
Banks' high capital ratios provide "a sturdy first-line-of-defense against any such event," Moody's said.
Additional reporting by Jeb Blount in Rio; Walter Brandimarte and Alexandra Alper in New York; writing by Stuart Grudgings; Editing by Leslie Adler