Fitch Drops Brazil’s Public Debt Outlook from Stable to Negative

RIO DE JANEIRO, BRAZIL – Fitch rating agency reduced the outlook for Brazil’s public debt from stable to negative. The decision was released on Tuesday evening, May 5th, and comes two years after the agency stated that it did not intend to revise the country’s rating.

The stable outlook means that the agency may reduce the country’s rating in the coming months or years. Currently, Fitch grants a BB- rating for Brazil, three levels below investment grade, a guarantee that the country does not run the risk of writing off the public debt. The stable outlook suggested that the rating would not be changed any time soon.

In a statement, Fitch mentioned two factors to support the decision. The first was the deterioration of the outlook for the economy, which came in a scenario of fiscal imbalances and low economic growth, but was aggravated by the novel coronavirus pandemic. According to the agency, the Gross Domestic Product (GDP) is expected to contract by four percent this year. Lower revenues and higher spending increase the government’s deficit and drive up public debt.

The second factor was political tension. According to the statement, there is a “volatile relationship” between the Executive and Legislative Powers, which could hinder the approval of structural reforms after the pandemic.

“Although the administration and Congress have worked together to pass a major welfare reform in 2019 and recent emergency measures to sustain the economy, recurring frictions have reduced the predictability of economic and political results and clouded the prospects for reform after the pandemic,” the text stressed.

The last time Fitch had downgraded the Brazilian rating was in February 2018, when the country’s rating was reduced to three levels below investment grade. This is the same grade awarded by S&P, another major rating agency. Moody’s ranks the country two levels below investment grade.

In early April, S&P had lowered the Brazilian rating perspective. At the time, the agency downgraded the outlook from positive to stable, suggesting that the agency had abandoned improving Brazil’s rating in the coming months.

The Ministry of Economy has not yet announced whether it will comment on Fitch’s downgrading of the Brazilian debt rating.

Source: Agência Brasil

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