RIO DE JANEIRO, BRAZIL – Fitch rating agency on Thursday, May 27, maintains Brazil’s long-term credit rating in local and foreign currency unchanged at BB-, as well as the “negative” outlook.
In a report released Thursday, Fitch said the country maintains high public debt, a rigid fiscal structure, fragile economic growth potential and a challenging political scenario that hinders the timely advancement of economic and fiscal reforms.
According to Fitch, the “negative” outlook for the country reflects risks to fiscal consolidation and economic recovery required to stabilize public debt in the medium term, following the sharp deterioration in Brazil’s fiscal accounts and public debt burden in 2020, particularly in light of the uncertain evolution of the pandemic, the vaccination process, and economic fallout.
Fitch projects GDP growth to reach 3.3% in 2021, after contracting 4.1% in 2020, and then slowing to 2.5% in 2022. A strong statistical carryover as well as external factors including higher commodity prices and the rebound in global (and China) growth support growth in 2021. Tightening macroeconomic policies and uncertainties related to next year’s election race could weigh on investment and growth in 2022.
The agency also points out that downside risks stem from the uncertain evolution of the pandemic and potential delays in the vaccination process. “Delays in the supply of vaccines from abroad and inputs for domestic vaccine production may delay the authorities’ schedule to vaccinate the vulnerable population until the end of the second quarter and a substantial portion of the entire population by year-end. Any loss of confidence in the trajectory of public finances could also undermine the recovery.”
Window of opportunity for reform
Fitch further stated that the government has resumed its reform agenda this year, but that the window of opportunity to pass these bills may be closed in early 2022, with the focus shifting to presidential and congressional elections.
“A tax reform to simplify the complex system and an administrative reform to contain payroll costs in the medium term and improve public sector efficiency have been presented to Congress. However, it is unclear how much progress is possible given the vested interests, the fluidity of Congressional dynamics, and the uncertainty surrounding the pandemic,” says the rating agency.
Nevertheless, Fitch recalls that Brazil has approved the Central Bank’s autonomy, sanitation and gas regulatory frameworks, the emergency PEC and the privatization of Eletrobras – the latter has only passed the Chamber of Deputies and still needs to be passed by the Senate.
The report points out that Brazil still has great fiscal challenges. The budget deficit reached 14% of GDP last year, with measures to address the pandemic, and should drop to 7.4% this year, still well above the median of countries in the same rating range, which is 5.2%.
Public debt, which was 88.8% of GDP last year, should fall to 86.8% this year, thanks to extraordinary items, such as the payment of debts by public banks.
Fitch believes that the government will comply with the spending cap this year, but points out that more than R$100 (US$19) billion in expenses (more than 1% of the GDP) were left out of this limit. The agency recalls that as part of the 2021 Budget deal, the government cut discretionary spending to extremely low levels to make room for parliamentary earmarks, which will severely restrict flexibility during budget execution.
Fitch says that pressure for new social programs for the coming years persists, and the potential addition of such spending commitments without offsetting measures could increase budget tightness.
On the monetary policy front, the report states that inflationary pressures have increased significantly, with the IPCA rising to 6.8% in April. Higher commodity and food prices and a weakened exchange rate have put pressure on inflation, which is expected to remain above the 3.75% target this year.
Fitch points out that after cutting the SELIC interest rate to a historic low of 2% in 2020, the Central Bank has reversed course by raising rates by 1.5 percentage points since March – and signaling further increases – to curb price pressures and avert a deterioration in inflation expectations.
Source: Valor