Fitch Downgrades Brazil to BB+ With Negative Outlook

Brazil’s downgrade reflects the economy’s deeper recession than previously anticipated, continued adverse fiscal developments and the increased political uncertainty that could further undermine the government’s capacity to effectively implement fiscal measures to stabilize the growing debt burden. The Negative Outlook highlights continued uncertainty and downside risks related to economic, fiscal and political developments. The deteriorating domestic backdrop is increasing challenges for the authorities to take timely corrective policy actions to support confidence and improve prospects for growth, fiscal consolidation and debt stabilization.

Brazil’s economic slump is not abating as highlighted by the third quarter of 2015 (3Q15) GDP figures with both consumption and investment retreating. The economy contracted by 1.7% (quarter-over-quarter [QOQ]) and 4.5% (year-over-year [YOY]) in 3Q15. Fitch now forecasts growth of -3.7% and -2.5% in 2015 and 2016, respectively with risks skewed mainly to the downside. Increased unemployment rates, constrained credit, depressed confidence and high inflation are weighing on consumption while political and policy uncertainties, the construction sector malaise and negative spill overs from the Petrobras corruption investigations and capex cuts have hurt investment. The external environment remains difficult for Brazil with the slide in commodity prices, China’s slowdown and tightening international financial conditions.

Fiscal deterioration continues against the backdrop of weaker economic conditions. In December, the government secured congressional approval for a 2% of GDP primary deficit ceiling for 2015, reflecting the adverse revenue performance, constrained ability to cut spending and potential one-time payments (of around 1% of GDP). The repeated changes in fiscal targets have undermined the credibility of fiscal policy. The weaker starting point of fiscal accounts, deeper-than- previously projected economic contraction in 2016 and increased political uncertainty in recent weeks cast further doubt on the ability of the government to secure timely legislative approval to meet its primary surplus target for 2016. Moreover, the passage of measures to structurally improve the outlook for public finances and enhance the credibility of medium term fiscal consolidation appears difficult in the current political environment.

via Fitch Ratings

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza