Brazil’s Economic Outlook

BRASILIA (Reuters) – Ratings agency Fitch noted on Thursday that Brazil’s recent economic outperformance has not improved public finances, predicting challenges for 2025 and an increase in public debt.

Fitch indicated in its report that Brazil’s strong economic performance might be partially due to the government’s lenient fiscal policy. If fiscal performance is weak during strong economic growth, it may worsen further in a downturn, Fitch warned.

“Uncertain consolidation prospects are a key macroeconomic vulnerability constraining Brazil’s ‘BB’/Stable sovereign rating,” the agency added.

Since last year, all three major ratings agencies have either upgraded Brazil’s rating or enhanced its outlook since President Luiz Inacio Lula da Silva took office. However, Brazil is still two notches away from regaining its investment grade rating, which was lost in 2015 due to a decline in commodity prices and lax fiscal policies.

This week, Lula met with representatives from Standard & Poor’s and Moody’s in New York, emphasizing the importance of them hearing directly from him regarding Brazil’s economic situation.

In Thursday’s report, Fitch characterized some of the government’s revenue-raising efforts as “improvisational measures,” indicating a commitment to fiscal targets without providing substantial fiscal improvements.

Fitch forecasts that the government will likely meet its fiscal target of eliminating the primary deficit this year, with a tolerance margin of 0.25% of GDP, including provisions for extraordinary spending beyond the official goal.

However, it revised Brazil’s primary deficit estimate to 1% of GDP next year, up from the previous 0.7% projection.

Fitch also highlighted that Brazil’s gross debt-to-GDP ratio is projected to rise to 77.8% this year, up from 74.4% last year, reaching 83.9% by 2026, the concluding year of Lula’s term.

“This is faster than previously forecasted, widening the gap to the ‘BB’ category median of 55%,” Fitch stated.