Fitch: Brazil GDP Forecast Shows External, Confidence Pressures

NEW YORK--(BUSINESS WIRE)-- The continuing impact on Brazil of depressed confidence, political uncertainty and stronger external headwinds underlies Fitch Ratings' recent revision of its growth forecast for the country. The depth and duration of the recession highlights the risk that persistent economic weakness could further undermine fiscal consolidation and government debt dynamics, as reflected in the Negative Outlook on Brazil's 'BB+' sovereign rating.

In our most recent "Global Economic Outlook", published on Monday, we cut our real GDP forecast for Brazil to -3.5% for 2016, from -2.5%. We still think growth will return next year, but it will be weaker than previously forecast, at 0.7%, down from 1.2%. Downside risks to our forecasts persist.

The revisions reflect our view that a dragged-out president impeachment process and concerns about Brazil's fiscal trajectory will continue to damage confidence, alongside external pressures from commodity prices, China's slowdown, and international financial market volatility. Rising unemployment and constrained credit will curb consumption, and policy and political uncertainty and the poor outlook for final demand will drive another sharp fall in investment.

Similar factors drove the 3.8% drop in real GDP reported by Brazil's statistics agency earlier this month (we had forecast a 3.7% fall). Gross fixed capital formation fell by 14.1% and household consumption by 4.0%.

Economic and fiscal performance and the evolving policy response in a difficult political environment remain key to our sovereign credit assessment. Our weaker growth forecast is one indicator of downside risk. Others include the government's request to Congress for greater leeway in its primary balance target, which could effectively allow it to run a primary deficit of around 1% of GDP in 2016. Economic underperformance and continued pressure on spending pose downside risks to fiscal goals.

Political developments remain fluid. Recent events, including the police questioning of former president Lula, are adding to uncertainty in an already difficult political scenario. Critics and supporters of the government have also called for protests in the coming weeks.

This suggests that political focus and energy could be consumed in containing the contamination from the expanding scope of the Lavo Jato investigations and the impeachment proceedings against president Rousseff at the expense of legislative progress. For example, the government was planning to propose a social security reform and introduce multi-year expenditure ceilings to improve medium-term fiscal prospects and better anchor expectations. But the political situation could make progress on such issues quite difficult.

The absence of credible, effective and timely policy adjustments to economic and fiscal deterioration was one factor we felt was incompatible with an investment-grade sovereign rating when we downgraded Brazil to 'BB+'/Negative in December. We discussed the downgrade and future ratings prospects at our "Fitch on Brazil" panel in New York on Tuesday. Our latest "Global Economic Outlook" is available at www.fitchratings.com, or via the link below.

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's Loss of Investment Grade: Economic, Fiscal and Political Risks Drove Downgradehttps://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=876500

Global Economic Outlookhttps://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878403

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160310006367/en/

Fitch Ratings
Shelly Shetty, +1-212-909-0324
Senior Director
Sovereigns
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY
or
Mark Brown, +44 203 530 1588
Senior Director
Fitch Wire
or
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[email protected]

Source: Fitch Ratings

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