Moody’s rebukes Brazil for excluding pandemic spending from fiscal ceiling

RIO DE JANEIRO, BRAZIL – Rating agency Moody’s has assessed that the exclusion from the spending cap of additional government spending, such as that linked to Covid-19, is negative for Brazil’s credit rating profile, which is at Ba2, with a stable outlook.

However, Moody’s vice-president and senior analyst, Samar Maziad, said in the report that “if recurring exceptions are created to accommodate spending above the ceiling”, the “credibility” of this instrument will be “questioned”. This will have “negative implications for the cost and dynamics of public debt” in Brazil, it added.

The rating agency referred to the agreement between the government and Congress so that the extra expenses related to Covid-19 will not be subject to the mandatory spending ceiling this year.

That pact laid the groundwork for this year’s Brazilian budget to be finally sanctioned by President Jair Bolsonaro.

The exclusion of additional health expenditures from the fiscal ceiling was the formula found by the authorities to adjust the accounts for 2021 and include a series of mandatory items that had not been contemplated in the text approved by Parliament.

However, economic agents observe this type of shortcuts and fear that the country’s chronic fiscal crisis will worsen even more this year.

In 2020, the public deficit reached 14% of Gross Domestic Product (GDP), and the debt reached record levels, above 90% of GDP.

This worsening of the fiscal situation resulted from the enormous disbursement made by the federal government to alleviate the economic effects of the coronavirus pandemic, with the distribution of, for example, subsidies that reached 68 million Brazilians.

Given the increase in the number of infections and deaths associated with Covid-19, the Executive has been forced to renstate these subsidies this year for the most vulnerable, although at lower amounts and a smaller number of beneficiaries.

Brazil is currently experiencing the worst phase of the pandemic, aggravated by the circulation of variants of the virus considered more infectious. By April 22, there have been more than 380,000 deaths and 14.1 million people infected.

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