Fitch: Brazil's Planned Fiscal Measures Face Political Risk

NEW YORK & LONDON--(BUSINESS WIRE)-- Early signals by Brazil's interim government to tackle spending increases and the social security deficit show a renewed focus on fiscal consolidation, Fitch Ratings says. However, political uncertainty remains high enough to affect the content, scope and pace of fiscal reforms. This uncertainty is one factor reflected in the Negative Outlook on Brazil's sovereign rating, which Fitch maintained when we downgraded Brazil to 'BB' in May 2016.

Michel Temer's interim administration took office after the vote to impeach Dilma Rousseff triggered her six-month suspension. Since then, new Finance Minister Henrique Meirelles has announced plans for a constitutional amendment to control spending growth. The government is also planning pension reform, although the exact details and the related savings are uncertain. It has begun to rein in quasi-fiscal stimulus by having Banco Nacional de Desenvolvimento Economico e Social (BNDES) repay to the Treasury BRL100bn over a three-year period, in sharp contrast to the loans extended by the Treasury to support BNDES lending in recent years.

These initiatives suggest a cohesive attempt at controlling spending, although they may not be sufficient to achieve rapid fiscal consolidation that would stabilize the growing government debt burden. Moreover, fiscal policy is still subject to political risk as the stability and durability of the interim government coalition, and its ability to implement economic reforms, is not guaranteed. The popularity of the Temer administration remains relatively low and the Lava Jato investigations are a continuing source of political disruption. Public tolerance of deep fiscal austerity may be constrained by the sharp and prolonged economic contraction and rising unemployment.

The interim administration has obtained approval for a new budget target for 2016, which envisages a federal government primary fiscal deficit of about 2.8% of GDP. The higher target reflects the challenges a weak economy presents to government revenues, and excludes revenues from asset sales, reflecting difficult market conditions. It also includes the cost of the moratorium on debt repayments that the federal government granted to state governments for the remainder of 2016.

The higher primary deficit target for 2016 means a weaker starting point for fiscal consolidation. Currently, Fitch projects that general government debt burden will climb to nearly 80% of GDP by 2017, assuming no costs to the sovereign from supporting banks or corporates. The 2017 primary deficit target is expected to be announced soon, which will provide a signal on the pace of consolidation that can be expected in the near term.

Government debt dynamics will not stabilise without primary surpluses and faster economic growth. Fitch currently projects subdued growth of 0.5% on an annual basis in 2017. Recent increases in business and consumer confidence and a reopening of domestic and international capital markets to some Brazilian corporates are positive signs. But a sustained rise in confidence and the pace of the recovery will be influenced by political developments and the credibility of fiscal adjustment.

Political stabilisation that translates into effective policy implementation and reduces macroeconomic imbalances, including creating greater confidence around public debt stabilisation, could stabilise the sovereign rating Outlook, as Fitch noted in our rating sensitivities when Brazil was downgraded in May. We think it will take time for the interim government's policy settings to become entrenched and for evidence of their effectiveness to emerge. Policy drift and an inability to implement measures that improve the outlook for public finances, government debt trajectory and growth would be credit negative.

Fitch discussed our outlooks for the Brazilian sovereign and Brazilian corporates and banks at our "Fitch on Brazil" investor events in Frankfurt and London last week.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Related Research

Brazil

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881462

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160705005903/en/

Fitch Ratings
Shelly Shetty
Senior Director
Sovereigns
Fitch Ratings, Inc.
+1 212-908-0324
33 Whitehall Street
New York, NY
or
Mark Brown
Senior Analyst
Fitch Wire
+44 203 530 1588
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• The Boulder Group Arranges Sale of Zero Cash Flow CVS in Houston MSA
• Hawk Fire: U-Haul Offers Disaster Relief to Reno Area Evacuees
• Economic study demonstrates scale, grade, long life, growth potential and robust financial returns