Fitch: Growth, Fiscal Prospects Still Key Brazil Rating Focus

NEW YORK & LONDON--(BUSINESS WIRE)-- The focus of Brazil's sovereign ratings assessment remains on the policy environment and whether measures are taken to improve the outlook for growth and public finances and slow down government debt accumulation following the vote by Brazil's Chamber of Deputies in favor of impeachment proceedings against President Dilma Rousseff, according to Fitch Ratings. The vote reflects the erosion of government's congressional support and the growing possibility of impeachment.

Twenty-five more deputies voted for impeachment on Sunday than were required for the two-thirds majority needed to send the impeachment motion to the Senate, which could vote in the coming weeks whether or not to start formal impeachment. If the Senate votes in favor of impeachment, President Rousseff would need to temporarily step down and Vice-President Michel Temer of the PMDB party, which withdrew from the governing coalition in late March, would take over.

The increase in political uncertainty late last year when the Lower House speaker accepted the request to start impeachment proceedings was one of the drivers of our downgrade of Brazil's sovereign rating to 'BB+' in December. The scope for continued deterioration in growth and public finances is reflected in the Negative Outlook on the rating.

If the president was impeached or there were a change of administration during the process, Fitch's ratings assessment would remain focused on how the policy environment evolves and whether this supports an effective fiscal correction. Besides any political realignment in Congress, we would also consider how the Lava Jato investigations, popular protests and economic contraction affect overall governability.

Any Brazilian administration would face a struggling economy and weak public finances. We forecast real GDP to shrink by 3.5% in 2016 and grow by just 0.7% next year due to political uncertainty, depressed confidence and external challenges, with risks skewed to the downside.

The combined impact of economic contraction denting revenues, automatic spending growth in some areas and shrinking room for further discretionary spending cuts makes structural fiscal reform key to stabilizing Brazil's public finances. These remain under pressure. The 12-month rolling public sector primary deficit rose to 2.1% of GDP in February from 1.9% in December. The 12-month rolling social security deficit rose to 1.57% of GDP from 1.45% in the same period, and the regional governments' aggregate 12-month rolling primary surplus is diminishing. Gross general government debt continues to climb, reaching 67.6% of GDP in February from 66.5% in December.

We discussed some potential implications of impeachment in our January Special Report, "Brazil's Loss of Investment Grade," available at www.fitchratings.com or by clicking the link below.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, 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 Downgrade

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=876500

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Fitch Ratings
Shelly Shetty
Senior Director
Sovereigns
Fitch Ratings, Inc.
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New York, NY
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Mark Brown
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Fitch Wire
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Source: Fitch Ratings

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