By BRASILIA (Reuters) – Ratings agency Fitch said on Thursday that Brazil’s better-than-expected economy has not translated into stronger public finances, forecasting a tougher 2025 and a steeper rise in the country’s public debt.
Fitch said in a report that Brazil’s strong recent economic performance may be partially driven by the government’s relaxed fiscal stance. If fiscal performance was weak when economic growth was strong, it could deteriorate further in an unexpected slowdown, the ratings agency said.
“Uncertain consolidation prospects are therefore a key macroeconomic vulnerability constraining Brazil’s ‘BB’/Stable sovereign rating,” it added.
All three major ratings agencies have either upgraded Brazil’s rating or improved its outlook since last year, when President Luiz Inacio Lula da Silva’s current term started.
Still, Latin America’s largest economy remains two notches away from regaining its investment grade rating lost in 2015 amid a sharp drop in commodity prices and loosening of fiscal policies.
This week, Lula met representatives from Standard & Poor’s and Moody’s (NYSE:MCO) in New York. He said on Wednesday in a press conference that it was important for the agencies to hear directly from him about Brazil’s situation.
In the Thursday report, Fitch said some of the government’s efforts to raise revenues were “improvisational measures” that showed a commitment to fiscal targets but did not offer structural fiscal improvements.
It forecast the government would meet its fiscal target of zeroing out the primary deficit this year, with a tolerance margin of 0.25% of gross domestic product and allowances for extraordinary spending that bypasses the official goal.
However, it revised Brazil’s primary deficit to 1% of GDP next year, up from the previous estimate of 0.7%.
Fitch also noted the country’s gross debt-to-GDP ratio is expected to rise to 77.8% this year, up from 74.4% last year, and reach 83.9% by 2026, the final year of Lula’s term.
“This is faster than previously forecast, widening the gap to the ‘BB’ category median of 55%,” it said.
