S&P Global Ratings downgraded Brazil’s sovereign debt outlook to “stable” on Monday, citing huge government spending to soften the economic blow from coronavirus, but said an increase in credit ratings was still more likely than a downgrade.
While the fiscal deficit is expected to double this year to 12% of gross domestic product, S&P remains confident that the government will continue its efforts to obtain public finance in order after the crisis is over.
The change in S&P’s view occurred only three months after which it raised it to “positive.” The rating agency maintains its BB non-investment rating, or the so-called “junk” rating.
“We still see opportunities for improvement that are higher than downgrades,” Livia Honsel, principal S&P Brazil analyst, told Reuters after the outlook was lowered.
“There is enough to support an increase to rank … but there is too much uncertainty at the moment. We are more careful, and we think the reform process will take longer,” he said.
S&P expects the government’s nominal budget deficit to double to 12% this year, gross national debt has risen by almost 10 percentage points to 85% of gross domestic product, and net debt has risen by an amount equal to 66% of GDP.
The primary deficit does not include interest payments, which the government is more concerned about, is likely to swell to 7% of GDP this year from 1% last year, S&P said.
The Brazilian government’s package of actions to combat the coronavirus crisis amounts to around 3.5% of GDP, according to the S&P. This is “significant” when compared to fiscal measures taken by developing market countries so far: Russia, 0.3% of GDP, Mexico 0.7%, India 0.1%, and Argentina 1%.
“We expect fiscal deficits and debt figures to worsen throughout 2020, driven by higher spending. Revenues will also decline due to economic contraction, tax relief related to COVID-19, and decreased oil royalties due to low crude oil prices, “S&P said in a note.
S&P cites the “big” uncertainty surrounding Brazil’s economic and fiscal path ahead, especially political tensions in Brasilia that could hamper the government’s economic and fiscal reform agenda.
Honsel said tax and administrative reform, the two main boards of the government’s reform agenda after pension reform was passed last year, could even be postponed until the next government was formed in January 2023. (Reporting by Jamie McGeever; Editing by Stephen Coates and Cynthia Osterman)
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