Fitch’s 2024 Outlook on Brazil: Fiscal Policy in Focus

Fitch Ratings has identified Brazil’s public finance sustainability and its primary fiscal target as key concerns for 2024.

Todd Martinez, co-director of sovereign ratings for the Americas at Fitch, emphasized the potential negative impact on Brazil’s economy if the government loosens its fiscal discipline.

Martinez pointed out Brazil’s growing debt and the absence of a clear stabilization strategy during a Credit Perspectives event.

The Brazilian government has initiated steps to boost tax revenue and balance public accounts, with several measures passed in 2023.

However, there is uncertainty about whether the expected increase in tax collection will materialize.

A shortfall in tax revenue could shift attention to this year’s goal of a zero primary deficit.

Martinez noted the possibility of government pressure to modify the fiscal target rather than cut spending.

He suggested that exploiting fiscal rule loopholes might be considered to reduce the need for spending cuts.

Relaxing fiscal targets could cast doubt on Brazil’s debt trajectory and put pressure on interest rates.

It might also limit Brazil’s ability to cope with potentially slower growth in the future.

This situation underscores the importance of strict fiscal management for Brazil’s economic stability.

Background

Brazil faces a big challenge with public debt. The OECD forecasts the debt will hit 80% of the GDP by 2024.

Without proper fiscal management, it could reach 100% by 2037. Debt levels are sensitive to policy changes.

The Brazilian government has made some reforms. A key tax reform was passed in late 2023. These changes aim to control public debt.

The new fiscal policy, which started in August 2023, targets budget issues. It introduces more flexibility and predictability.

The OECD notes that under Bolsonaro, debt decreased from 87% to 73% of GDP between 2021 and 2022.

This decrease was due to economic recovery. However, there is a risk of debt growing again. This is because of current fiscal policies.

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