Fitch lowers Brazil’s outlook to negative

Risk rating agency Fitch reduced the outlook on the rating of Brazil’s public debt from stable to negative. The move was unveiled Tuesday evening (May 5) and comes two years after the agency signaled it would not revise the country’s rating.

The change means the agency may lower the country’s rating in the coming months or years. A stable outlook meant the rating would not be changed soon.

As it stands today, Fitch classifies Brazil as BB-, three notches below investment grade, which means the country is not likely to default.

In a statement, Fitch named two factors justifying the decision. The first was the deterioration of perspectives on the economy, amid a landscape of fiscal imbalances and low growth, aggravated by the pandemic of the novel coronavirus and the resulting drop in tax collection and higher expenditures, which raise the government’s deficit and increase public debt. Brazil’s GDP is likely to contract by four percent this year, the agency added.

The second driver was political tension. According to the note, there is a “volatile relationship” between the executive and the legislative, which may hinder the approval of structural reforms after the pandemic.

“While the administration and Congress worked together to pass an important pension reform in 2019, and the recent emergency measures to support the economy, periodic frictions have reduced the predictability of economic and political outcomes and cloud post-pandemic reform prospects,” the text reads.

The last time Fitch had lowered Brazil’s rating had been in February 2018, when it was brought down to three notches below investment grade. This is the same rating granted by S&P, another major rating agency. Moody’s places the country two levels below investment grade.