Pandemic puts additional strain on Brazil's public finances

Pandemic puts additional strain on Brazil's public finances

Economy & Policy Structured Finance Regulation Politics Coronavirus Brazil

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Latin America is a mixed bag when it comes to credit quality, and major economies like Brazil are likely to face major challenges in the wake of the COVID-19 pandemic, according to S&P Global Ratings.

"We believe that the capacity of the countries to address the COVID-19 shock varies widely among the countries and depends largely on their situation prior to the crisis," said Livia Honsel, director of sovereign and international public finance at S&P.

Brazil, the largest economy in the region, is among the countries that was facing major challenges before COVID-19 hit.

"The economy was growing slowly prior to the crisis largely due to structural factors," Honsel said. "Brazil's growth has been weak compared to other countries with similar ratings."

S&P affirmed Brazil's BB- rating in April, changing the outlook to stable from positive due to a deterioration of the country's economic and fiscal outlook as a result of the pandemic. The rating agency expects the Brazilian economy to shrink 7% this year, followed by a recovery of 3.5% in 2021 and 3% in 2022.

Brazil's recovery will depend on structural reforms, but the government's commitment to those reforms is not clear, Honsel said. "The pandemic has increased existing political tension, bringing doubt about the capacity to resume the agenda of reforms after the shock," she said.

On the other hand, Brazil has low foreign currency debt and sizeable cash buffers, she added.

Brazil's state and municipal governments also face structural challenges that could affect its credit ratings, said Daniela Brandazza, senior director of international public finance at S&P.

Local budgets are inflexible, with pension payments surpassing 50% of spending in many cases. Even where pensions only take up 40% of spending, the budgets remain inflexible and restrictive as personnel and interest payments take up over 50% of revenues, placing capital expenditures at a low 6%, she said.

Local government budgetary performance is expected to suffer in 2020, while recovery will be uneven and may take a few years, according to Brandazza. "Transfers from the central government will alleviate but not solve the problem," she said.