Brazil election tension rises as Fitch sounds warning
After Standard & Poor's downgraded Brazil to BBB- in March, Fitch says it will closely monitor “whether the government stays the course” after the October election
A failure by the Brazilian
government to keep fiscal dynamics under control after the
October election could prompt a downgrade from Fitch Ratings,
the agency cautioned on Thursday.
While defending Fitch's BBB
rating and stable outlook on Brazil, future tightening of
fiscal policy was "a necessary pill", said Shelly Shetty, the
agency's head of Latin American sovereigns. The agency would
look at whether the government "stays the course" of
rebalancing its fiscal account, taming inflation, attracting
private investment in infrastructure - and resisting "raiding"
the public-sector banks.
The warning from the rating
agency came as anxiety builds among Brazil investors about the
potential for market volatility to accompany the election.
Still, Brazil enjoyed political
stability and an understanding among policymakers of the
importance of macro-economic stability, said Shetty. But the
agency would monitor events after the elections, she said,
looking for greater fiscal conservatism including public sector
bank lending - which she said would "dictate our judgments" on
the country's debt trajectory.
Brazil's sovereign rating has
been in particular focus
since Standard & Poor's downgraded the country to BBB- in
late March. But there was no "explosive situation" in
Brazil's government debt, Shetty said.
"In some ways, Brazil comes out
as one of the strongest in the Fragile Five," she said,
referring to Morgan Stanley's label for the five emerging
markets it sees as particularly vulnerable to tighter US rate.
"We don't think Brazil is necessarily underperforming other key
Fitch took note of Brazil's
growing macro-economic problems and more troublesome inflation
outlook "a couple of years ago", said Shetty. This had stopped
the agency becoming too optimistic on the sovereign when
Brazil's weaknesses were less widely acknowledged than they are
today, she said.
Slowing economic growth and
rising inflation were important factors in the agency's
consideration of risks in Brazil, according to Shetty. The
agency was also monitoring the deterioration in the state's
primary surplus to 1.9% of GDP last year, and its debt-to-GDP
level of 58% - much higher than the 40% median for triple-B
Nevertheless, she noted "policy
corrections in the last few months" including higher benchmark
rates, more flexibility on the exchange rate, government
policies to attract more private investment in infrastructure,
and "signals that the government would prevent future fiscal
She also referred to the
country's large central bank reserves, making Brazil "one of
the strongest creditors in the BBB category" despite its weak
economic growth and high government indebtedness.
Brazil's downgrade by S&P
has not hindered its access to bond markets. It
sold a bond in euros just days after the rating cut,
part of a renewed effort by the sovereign to deepen its
engagement with European investors, the country's head of
debt management, Paulo Valle, told LatinFinance.
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