Fitch reaffirms Brazil’s “BB-” rating with stable outlook, but highlights uncertainties about elected government

The risk rating agency Fitch Ratings reaffirmed the sovereign rating for Brazil at BB- and maintained a stable outlook, but highlighted high uncertainties ahead regarding the elected government’s plans and their impact on economic and fiscal challenges.

The agency highlighted that Brazil’s ratings are supported by its large and diversified economy, high per capita income, sovereign financing capacity in local currency and capacity to absorb shocks supported by a flexible exchange rate, low external imbalances and international reserves. robust.

On the other hand, the ratings are constrained by high government indebtedness, a rigid fiscal structure, weak economic growth potential and a history of governance challenges that have hampered efforts to address these fiscal and economic issues and clouded policy predictability.

“The stable outlook reflects Fitch’s expectation that growth will slow over the next year and that the recent fiscal improvement will erode under a new administration, but within a range consistent with the current rating and a better starting point than the current one. previously expected. Uncertainty is high regarding the new government’s plans and the extent to which they can alleviate or exacerbate fiscal and economic challenges. However, Fitch does not expect policies that compromise overall economic stability,” he points out.

Fitch points out that Luiz Inácio “Lula” da Silva, of the Workers’ Party (PT), will take over as president in January after a narrow victory over the current Jair Bolsonaro in the October 2022 elections and that the PT promises a departure from the agenda liberal economy of recent years. “But it is unclear how strong the policy change he will seek will be, which has been a source of market volatility since the election. Changes in fiscal and microeconomic policies are likely, but concrete proposals still need to emerge, and Fitch hopes that monetary/exchange policy and the autonomy of the Central Bank (BCB) will not be affected”, he points out.

In addition, a fragmented congress, in which conservative parties have increased their space, may represent a constraint for Lula’s agenda, but it is not certain that it represents a force for fiscal discipline in Fitch’s view, in view of the expansionist fiscal measures taken before the elections and considered currently, during the transition period.

Fitch projects 3.0% GDP growth in 2022, reflecting surprisingly strong momentum for the year, supported by the final stages of the post-pandemic economic reopening, stimulus measures and a strong job market. “Growth is cooling off, however, due to the lagged effect of substantial monetary tightening, and the expected global slowdown will be an additional drag.” The agency expects growth to slow to 0.7% in 2023 and may be sensitive to expansionary fiscal policies, as these can fuel domestic demand but also adversely affect confidence and force the Central Bank to extend or intensify the policy. restrictive currency.

The agency also reinforces that a liberal economic agenda took shape in the last five years (labor reform, concessions/privatizations, regulatory changes) and helped to improve the business climate as public investment decreased and investment/GDP increased to 19% , compared to the previous value of 15%. “That agenda will diminish with Lula, who has promised to halt privatizations and has advocated a return to a state-led growth model. But concrete plans are yet to take shape. The government has indicated that its short-term priorities may include tax reform, to reduce complexity and potentially increase revenues, and changes to labor laws.

For Fitch, it is likely that the government will seek to redirect the corporate strategies of state-owned companies, such as the oil company Petrobras (PETR3;PETR4) and development bank BNDES, having criticized their downsizing and shift to market-based pricing policies in recent years. Fitch expects such a shift to be gradual, rather than a full return to aggressive interventionism and quasi-fiscal policy.

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