(Bloomberg) -- Brazil’s government would need to hit its fiscal targets, stabilize government debt around current levels and build fiscal credibility before it can score a credit score upgrade, according to Fitch Ratings.
While a fiscal framework by President Luiz Inacio Lula da Silva’s administration and a long-awaited overhaul of the country’s tax code have been welcomed, Fitch currently doesn’t see the debt burden falling or even stabilizing at a fast-pace yet, said Shelly Shetty, managing director and the head of Asia and Americas Sovereigns at the ratings firm.
“We are still seeing fiscal uncertainties, we are still seeing debt in an upward path,” Shetty said in an interview in Sao Paulo. “We don’t think the rating is moving up in the near term, and the investment grade question is obviously further down the road.”
Fitch upgraded Brazil to BB — two notches below investment grade — since July 2023, with a stable outlook. S&P Global Ratings and Moody’s Ratings also improved their stances on the country since mid-2023.
Lula’s government has faced mounting scrutiny over its commitment to fiscal health, with investors concerned about the president’s willingness to agree to spending cuts to hit budget targets. Finance Minister Fernando Haddad has told local media he believes Brazil can recover its investment grade rating, which was stripped nearly a decade ago.
Its large and diverse economy, as well as its flexible exchange rate, may help it navigate external shocks — and those are investment grade features, according to Shetty.
“But what pulls down Brazil’s rating is the fact that the economic growth prospects remain on the weaker side,” she said, adding its fiscal deficits and debt burden are also “much higher” than Fitch’s BBB median.
Fitch is projecting that Brazil’s debt will cross the mark of 80% of GDP in the next couple of years, and continue to rise to about 86% of GDP after that, Shetty said.
“For us to upgrade to a higher level, we would be looking at the fiscal, economic performance of Brazil,” she said.
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