Fitch Ratings, the international rating agency, has today affirmed the sovereign ratings for Brazil as follows: long-term foreign currency ‘BB-‘; long-term local currency ‘BB-‘; short-term ‘B’.
According to Fitch, the outlook on the ratings remains stable. The ratings reflect a balance between the favorable trends in Brazil’s external finances and the risk that political gridlock could hamper improvements in public debt dynamics and constrain economic growth.
“Recent accusations of vote-buying involving the ruling PT party must be taken seriously,” said Roger Scher, Managing Director, Latin American Sovereigns, Fitch Ratings.
“We will wait and see if corruption investigations in Congress obstruct the budgetary process and in fact lead to fiscal slippage.”
The LDO budget guidelines bill and the 2006 budget due out in August will be key tests for this government.
Output growth figures in the second half of 2005 will indicate whether the negative political developments are having economic ramifications.
Officials of the PT party have been accused of bribing congressman for key votes, and coalition members of improper use of funds in the postal and reinsurance authorities.
The Lula government has acted to contain the negative fallout by dismissing some officials allegedly involved. Corruption investigations could prevent the passage of reforms and stymie the budgetary process, though Fitch does not expect any major fiscal or monetary policy slippage as a result.
A downside political scenario cannot be ruled out, however, in which key economic policy officials are implicated and forced to resign and some policy slippage ensues.
Difficulty getting important government positions confirmed by the Senate is possible; for example, in the event of the resignation of a central bank board member. Uncertainty about the outcome of the October 2006 national elections has increased as well.
Brazilian balance of payments performance continues to be favorable, with annual export growth over the last 2 1/2 years averaging 27%.
However, certain commodity prices (for steel and agricultural goods) have moved lower, global growth is softening, and the Brazilian Real has strengthened, resulting in signs of slower Brazilian export growth.
“Given the time lag of the effect of the exchange rate on trade performance,” said Scher, “Fitch will closely watch fourth quarter export figures as an indication of the sustainability of Brazil’s quite striking export growth story.”
Export growth and a paydown of external obligations have driven improving performance on one of Fitch’s key external solvency indicators.
Net External Debt (NXD) to Current External Receipts (CXR) is expected to fall to just over 100% by year-end 2005 and 90% next year from 233% in 2002, though this still lies well above the forecast 2005 ‘BB’ median of 43% for this indicator.
On public finances, last year the Lula government outperformed its original primary budget surplus target of 4.25% of GDP, achieving 4.58% on strong tax revenue growth.
Nevertheless, given how robust 2004 GDP growth was (4.9%) and how high 2004 general government (GG) debt was (75.3% of GDP), perhaps more of the windfall could have been saved.
GG debt to GDP compares unfavorably to the ‘BB’ median of 51.2%; but relative to GG revenues, at 200%, GG debt is lower than the ‘BB’ median of 235%. Furthermore, Brazil’s government has nearly 10% of GDP in liquid deposits at the central bank.
“With inflationary pressures ebbing, real interest rates could move lower later this year,” said Scher. “This is important because without lower rates and sustained higher GDP growth, the government debt-to-GDP ratio may not fall markedly in the near future.”
Fitch will hold a conference call on the Brazil, discussing recent corruption investigations as well as the ratings affirmation on Wednesday, July 13, at 10:30 a.m. EDT (3:30 p.m. GBT).
Fitch Ratings – www.fitchratings.com