Fitch Warns Brazil's Economy Outpaces Fiscal Improvements

Despite Brazil’s strong economic performance, Fitch Ratings cautioned on Thursday that it has not translated into improved public finances. The agency anticipates challenges in 2025 and forecasts a steeper rise in the country's public debt.

Fiscal Stance and Growth Concerns

Fitch highlighted that Brazil’s recent economic growth may be partially driven by the government's fiscal policies. The ratings agency warned that if fiscal health is weak during periods of economic strength, it could further deteriorate in the event of an unexpected slowdown. This dynamic is a "macroeconomic vulnerability constraining Brazil’s 'BB'/Stable sovereign rating," Fitch stated.

Lula’s Meetings and Fiscal Forecast

While all three major credit rating agencies have either upgraded Brazil’s rating or improved its outlook since President Luiz Inacio Lula da Silva took office, the country remains two notches away from regaining its investment-grade status. President Lula recently met with representatives from Standard & Poor’s and Moody’s in New York to present Brazil’s financial outlook firsthand.

In the Thursday report, Fitch described some government measures to raise revenue as "improvisational," signaling a commitment to fiscal targets without structural reforms. The agency forecasts the government will achieve its fiscal target of a primary deficit at zero this year, but revised its 2024 primary deficit projection to 1% of GDP, up from 0.7%.

Rising Debt and Credit Constraints

Brazil’s gross debt-to-GDP ratio is expected to rise to 77.8% this year, from 74.4% in 2022, and is projected to reach 83.9% by 2026. Fitch notes that this increase is faster than previously forecasted, further widening the gap to the 'BB' category median of 55%. While Brazil’s economy remains resilient, its fiscal challenges and rising debt continue to hinder the path to a stronger credit rating.