Moody's revises Brazil outlook to stable, citing reform prospects

BRASILIA (Reuters) - Ratings agency Moody's Investors Service on Monday revised the outlook for Brazil's sovereign rating from negative to stable, in a vote of confidence that the winner of this year's elections will deliver an unpopular agenda of cuts to government spending.

In a statement, Moody's analysts said faster-than-expected economic growth is also likely to support austerity efforts, which have failed to bring the government's debt metrics to levels consistent with similar-rated peers.

"Moody's expects the incoming administration to resume efforts to approve further reforms that will be needed, in particular to social security, to comply with the constitutionally-mandated spending ceiling," the statement said.

The more optimistic tone came just days after the imprisonment of former President Luiz Inácio Lula da Silva, who has railed against the current government's belt-tightening efforts and leads polling ahead of an October presidential vote.

Lula turned himself in to police on Saturday to begin serving a 12-year sentence for a bribery conviction, effectively impeding his efforts to return to power.

Brazilian markets fell on Monday as traders feared his supporters could turn to a similar candidate in a wide-open field of candidates, many of whom are appealing to voters' anger after a painful downturn and sweeping corruption scandal.

Still, Moody's cited a consensus among political leaders at the costs of abandoning fiscal responsibility, particularly due to a constitutional amendment limiting growth of public spending passed by President Michel Temer's administration.

Moody's kept Brazil's rating at Ba2, two notches below investment-grade status. Faster-than-expected fiscal reforms could spur an upgrade, while "a re-emergence of political dysfunction" or "stalled reform momentum" may trigger a downgrade, Moody's said.

(Reporting by Bruno Federowski; editing by Diane Craft)