Ratings agency Fitch has maintained Brazil’s speculative credit rating on Friday (19), citing uncertainties in the economy’s recovery and structural weakness in finance. The outlook remains negative, which means that there may be downgrades in the coming months if the agency understands that the conditions indicated have not improved.
The note was kept in “BB”, second step below the investment grade (category attributed to countries considered to be lower default risk, which, therefore, obtain financing with lower interest rates).
The upkeep comes a day after markets reacted with panic to news reports indicating that President Michel Temer would have endorsed the payment of bribes to silence former deputy Eduardo Cunha.
According to Fitch, the maintenance of the rating is justified by the growing indebtedness of the government, which compromises public finances, weak prospects for expansion and weakened governance indicators compared to countries of the same size as Brazil. These factors, along with what the agency calls “repeated episodes of political instability,” have negative implications for the Brazilian economy, he adds.
The agency sees improvement in economic policies and believes that adjustment in foreign markets, inflation and better anchoring of price expectations and also approval of the spending ceiling could facilitate fiscal consolidation.
The negative outlook, he continues, reflects uncertainties for the recovery of the Brazilian economy, the prospects for the medium-term stabilization of public debt due to fiscal imbalances and the evolution of the legislative agenda, specifically with respect to the reform of the Pension Plan.
Fitch estimates that the Brazilian economy will grow 0.5% this year and 2.5% in 2018, despite seeing risks to these projections, such as high unemployment and permanent political and fiscal uncertainties.
The growth for 2018 could gain strength with the help of the Central Bank’s interest rate policy, and also with the contribution from abroad.
“High financial volatility abroad and in the domestic scenario, a downturn in the pension reform that could undermine confidence and a lesser impact of monetary easing on domestic demand continue to pose downside risks to the growth outlook,” Fitch said in the statement. .
According to Fitch, the political landscape continues to be challenging, despite the relief brought about by reforms and support at the grassroots level. “The approval of some reforms attests to the strong coalition of the Temer administration base, but widespread governance and the reform process remain vulnerable by expanding the scope of Lava Jato’s investigations, which now involve political leadership,” the statement said.
The presidential and congressional elections in 2018 are cited as foci of uncertainty.
On Thursday, support for the Temer government was put on hold after the president was taped by businessman JBS president Joesley Batista in talks that he had learned of a plan to remove a Republican prosecutor who was investigating the group.
The Presidential Palace confirmed a meeting with Joesley, but Temer says he “never called for payments to silence Cunha.