News Column

Fitch: Fiscal Tightening Key to Improving Brazil Govt Debt Path

February 4, 2014

CHICAGO --(BUSINESS WIRE)-- A tightening of fiscal policy would enhance the credibility of Brazil's overall macroeconomic policy framework and help in placing the government's debt dynamics on stronger footing, according to Fitch Ratings. This would be supportive of Brazil's 'BBB' sovereign rating. Fiscal tightening could help improve investor confidence and benefit the outlook for inflation as well, thereby supporting the sovereign's credit profile. Inflation has remained elevated despite a slow economic recovery and a monetary tightening of 325 bps since last year. IPCA inflation reached close to 6% in December 2013 , which is above the midpoint of the 4.5%+/-2% inflation target. Brazil's primary surpluses have continued to diminish in recent years. This has been underpinned by slower revenue growth amid continued spending pressures. Revenues have been hurt by sluggish economic activity and tax cuts. At the same time, current spending growth remains relatively high and continues to detract from fiscal consolidation efforts. Fiscal results for 2013, published last week, signal that fiscal policy remained expansionary with spending growth continuing at robust levels last year. Brazil's consolidated public sector primary surplus declined to 1.9% of GDP in 2013 from 2.4% in 2012, which was lower than the government's adjusted target of 2.3%. Regional governments underperformed relative to their target and the federal government could not completely offset that shortfall. As a result, the nominal public sector deficit reached 3.3% of GDP last year, compared with 2.5% in 2012. Central government primary spending increased by approximately 14% last year, compared with 11.2% revenue growth. Current spending showed fast paced growth, which undermines the quality of overall spending. Fiscal receipts got an important boost from nonrecurrent revenues stemming from the signing bonus of the auction of the Libra oil field as well as the Tax Debt Installment Program (Refis). We believe high reliance on nonrecurrent revenues highlights the need for the government to control spending. This is especially important in the context of moderate economic growth, which will likely constrain a robust recovery in fiscal revenues. Brazil's general government debt burden reached 57.2% of GDP in 2013. The country's debt level remains heavier than the 'BBB' median of 40% of GDP, highlighting the importance of reducing the debt burden to create fiscal space for confronting future shocks. Fitch has emphasized that Brazil's public finances continue to represent a relative weakness for its credit profile. Fitch last affirmed Brazil's foreign and local currency IDRs of 'BBB', with a Stable Outlook, in July 2013 . One of the negative rating sensitivities that we highlighted at that time was a material fiscal slippage, leading to rising government indebtedness. We will continue to monitor Brazil's fiscal stance in 2014 (an election year) and beyond, focusing on whether fiscal policy is compatible with a stabilization and eventual decline in the government's debt burden. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at . All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' WWW.FITCHRATINGS.COM '. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Ratings Shelly Shetty Senior Director Sovereigns +1 212 909 0324 or Bill Warlick Senior Director Fitch Wire +1-312-368-3141 Fitch, Inc. 70 W. Madison Chicago, IL 60602 or Media Relations: Elizabeth Fogerty , +1-212-908-0526 ( New York ) Source: Fitch Ratings

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