Fitch Cuts Brazil’s Outlook To Negative Amid Fiscal Challenges

The outlook on Brazil’s credit rating was cut to negative by Fitch Ratings due to challenges in implementing fiscal adjustment amid a stalled economy, according to a statement released on Thursday.

The ratings agency lowered its outlook on Brazil’s sovereign rating to negative from stable while keeping the country’s rating at BBB, which is the second-lowest investment grade.

In the statement, Fitch said the key factors for the revision of the outlook were due to Brazil’s ongoing economic underperformance, increased macroeconomic imbalances, deterioration of fiscal accounts, and a material increase in government indebtedness are increasing downward pressure on the sovereign credit profile.

Fitch said that although the government has started a macroeconomic adjustment process to boost policy credibility and confidence, downside risks related to its effective implementation and durability persist, especially in the context of the nation’s challenging economic and political environment.

Brazil’s fiscal accounts have deteriorated “markedly” over the past year, Fitch said, and the nation’s elevated inflation alongside its ‘twin deficits’ highlight its macroeconomic imbalances. Inflation is hovering at over 8%, and will continue to face pressure during 2015 due to depreciation of the nation’s currency and the increases in regulated prices.

President Dilma Rousseff’s second administration faces a challenging political mix characterized by record low popularity as well as a fragmented and confrontational Congress. The ongoing Petrobras corruption investigations have the potential to further contaminate the political environment. As such, the government could confront challenges in progressing on its legislative agenda, which is important for it to meet its fiscal targets and restore broader confidence, Fitch said.

The Brazilian economy grew by a mere 0.1% in 2014 and is forecast to contract by 1% in 2015, Fitch said.

Last year Standard & Poor’s (S&P) gave Brazil its first sovereign downgrade in more than a decade. S&P currently rates the nation at BBB-, the lowest investment grade. Moody’s Investors Service, which rates Brazil one level higher, placed the nation on negative outlook in September.