Fitch Ratings has reaffirmed Brazil’s long-term foreign-currency issuer default rating at BB, still in junk territory, with a stable outlook.
While praising the country’s large and diversified economy, high per capita income, and a large cash cushion, Fitch highlights multiple uncertainties regarding the country’s ability to bring public accounts into the black.
“Brazil’s fiscal position is on track for a substantial deterioration in 2023, driven by sluggish revenues, large spending increases mostly related to the expansion of social benefits and settlement of the remaining stock of court-ordered repayments [IOU bonds known as precatórios],” Fitch noted in a statement.
Moreover, Fitch said the effectiveness of the Finance Ministry’s fiscal framework is still to be tested. The government has a zero-deficit target for 2024, with a tolerance band of ±0.25 percent of GDP.
Congress, however, has deprived the government of an important source of revenue by extending payroll tax exemptions to 17 economic sectors. On the other hand, lawmakers on Friday changed the rules for state-level tax incentives in a way that should increase federal tax revenue.
Fitch praised the Luiz Inácio Lula da Silva administration for taking a pragmatic approach to policymaking, despite calls from factions within the ruling Workers’ Party for more public spending. Still, the agency notes that “material policy shifts that undermine fiscal credibility, financing flexibility, and medium-term public debt sustainability” could lead to a future downgrade of Brazil’s rating.
In July, Fitch upgraded Brazil’s credit rating from BB- to BB. At the time, it said the move reflected “better-than-expected macroeconomic and fiscal performance in the face of successive shocks in recent years.”
The agency improved its expectations for Brazil’s economy — revising its 2.3 percent GDP growth forecast in July to 3 percent now. The change comes after three quarters of better-than-expected results.
In Q1, spectacular results posted by agribusiness were the key GDP driver. In Q2 and Q3, the results were largely explained by the services and industry sectors.
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