Brazil’s Path to Investment Grade: Fiscal Reforms and Economic Growth

Brazil must better manage its public accounts to achieve “investment grade” status from international credit rating agencies.

Todd Martínez of Fitch Ratings emphasized the urgency of addressing Brazil’s rising debt, projected to reach 80% of GDP by 2025.

Martínez pointed out that Brazil’s high and increasing debt “prevents the country from reaching investment grade.”

He stressed that the management of public accounts remains a significant weakness in the national economy.

Last week, Fitch upgraded Brazil’s credit rating from BB- to BB, placing it two notches below investment grade.

Brazil held a BBB- rating, the lowest investment grade, between 2008 and 2015 before losing it at the end of 2015.

Martínez criticized Brazil’s fiscal framework for being overly flexible, hindering significant improvements in public accounts.

Fitch projects that the primary deficit relative to GDP will be 0.7% this year and 0.5% in 2025.

Martínez said the budget surplus must be 2% of GDP, but the government thinks 1% is enough.

“We expect gross debt to hit 80% of GDP by 2025 and exceed it in 2026,” Martínez predicted.

Failing to meet fiscal targets in two years “won’t be a bad thing,” as the fiscal framework limits long-term deterioration.

Brazil’s Path to Investment Grade: Fiscal Reforms and Economic Growth

Martínez said labor, fiscal, and central bank reforms could boost Brazil’s growth. “GDP growth of 3-4% could improve Brazil’s rating.”

In this context, Martínez believes “GDP growth might surprise on the upside more quickly than fiscal improvements.”

Fitch estimates Brazil’s GDP will rise by 1.7% in 2024, indicating a promising yet challenging economic path.

This narrative underscores the interplay between fiscal discipline and economic growth in achieving investment grade status.