S&P confirms BB- rating for Brazil; stable outlook

RIO DE JANEIRO, BRAZIL – Rating agency S&P Global has affirmed Brazil’s foreign currency rating at BB-. The announcement was made on Tuesday, November 30. The outlook for the country’s rating is stable.

“Spending pressures and the high-interest burden are likely to lead to slow fiscal consolidation, with general government net debt trending toward 75% of GDP by 2024,” said S&P, which believes that the stable outlook for the grade assumes that the government will gradually stabilize its recent growth in public debt.

In the statement, the agency reiterated that Brazil has recovered faster than expected from the Covid-19 crisis in 2020, but that the country’s growth outlook is moderate. Growth of 4.8% is forecast for 2021, followed by gross domestic product (GDP) growth of 0.8% in 2022, 2.0% in 2023, and 2.3% in 2024.

AMENDMENT TO THE CONSTITUTION (PEC)

S&P Global commented on the PEC, which defers payment of federal debts and modifies the calculation of the spending cap, noting that the proposal highlights Brazil’s “long-standing” difficulties in controlling public finances. The agency affirmed the country’s foreign currency rating at BB- and maintained a stable outlook on the grade.

“The government is seeking to amend Brazil’s constitution to slightly modify the spending cap law to invest more in social programs and to make partial payments in 2022 for rising liabilities from court decisions,” it said.

“The changes to the spending cap highlight the long-standing difficulties in controlling and reducing the budget deficit in a sustainable manner. More than 90% of budget spending is non-discretionary, reflecting commitments to various mandatory spending programs and other revenues,” S&P said.

The agency’s analysts also presented two scenarios for the future of Brazil’s credit rating.

They said a downgrade was possible in the next two years if fiscal results were worse than expected, indicating weaker institutional capacity to implement corrective fiscal measures. “A loose fiscal consolidation stance could also maintain high inflation and limit monetary policy flexibility,” S&P commented.

On the other hand, in a positive scenario, an upgrade of Brazil’s rating is possible if gross domestic product (GDP) growth is higher than expected and the fiscal position “improves significantly.”

ELECTIONS

Rating agency S&P Global expects “broad continuity” in Brazil’s main economic policies after the 2022 elections. This statement is included in the report announcing the maintenance of Brazil’s BB- rating.

“Brazilian policies will be determined by the national elections in October 2022 for president, national congress, and governors. We expect broad continuity in key economic policies after the elections. The new administration will likely face a fractured legislature, reinforcing the need for pragmatic policies. So far, the two main presidential candidates are President Jair Bolsonaro and former President Lula da Silva,” S&P said.

On the characteristics of Brazil’s legislature, S&P notes the country’s limited ability to advance the structural reforms needed to accelerate growth and reduce public debt.

“Brazil is a stable democracy with comprehensive checks and balances, including an active judiciary. It enjoys political stability and continuity in key economic policies. However, the country’s political system requires a broad consensus to pass any law,” the agency said.

“The combination of such an institutional framework and a highly fragmented Congress with many political parties often delays or prevents fiscal (e.g., tax) and other reforms that could address economic shortcomings in a timely manner.”