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S&P lowers Brazil outlook to 'stable,' but door still open to upgrade

[BENGALURU] S&P Global Ratings lowered its outlook on Brazil's sovereign debt to "stable" on Monday, citing huge government spending to soften the economic blow from the coronavirus, but said a credit rating upgrade is still more likely than a downgrade.

While the fiscal deficit is expected to double this year to 12 per cent of gross domestic product, S&P remains confident that the government will resume its drive to get public finances in order once the crisis is over.

S&P's outlook change comes barely three months after it had raised it to "positive". The ratings agency maintained its BB- non-investment grade, or so-called "junk" rating.

"We still see a higher chance of an upgrade than a downgrade," Livia Honsel, S&P's lead sovereign Brazil analyst, told Reuters after the outlook had been lowered.

"There's enough to support an upgrade to the rating ... but there's too much uncertainty right now. We are more cautious, and we think the reform process will take longer," she said.

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S&P expects the government's nominal budget deficit to double to 12 per cent this year, the gross national debt to rise by almost 10 percentage points to 85 per cent of gross domestic product, and net debt to rise by a similar amount to 66 per cent of GDP.

The primary deficit excluding interest payments, which the government pays more attention to, will likely swell to 7 per cent of GDP this year from 1 per cent last year, S&P said.

The Brazilian government's package of measures to combat the coronavirus crisis amounts to around 3.5 per cent of GDP, according to S&P. This is "significant" when compared to the fiscal measures taken by other emerging market countries so far: Russia, 0.3 per cent of GDP, Mexico 0.7 per cent, India 0.1 per cent, and Argentina 1 per cent.

"We expect the fiscal deficit and debt figures to deteriorate throughout 2020, driven by higher spending. Revenues would also decline due to economic contraction, tax relief related to Covid-19, and declining oil royalties because of low crude oil prices," S&P said in a note.

S&P cited "considerable" uncertainties surrounding Brazil's economic and fiscal road ahead, notably political tensions in Brasilia which could hamper the government's economic and fiscal reform agenda.

Ms Honsel said tax and administrative reform, two of the main planks of the government's reform agenda after pension reform was passed last year, could even be delayed until the next government is formed in January 2023.


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