Fitch Warns Brazil’s Fiscal Challenges Will Persist and Intensify Next Year, According to Reuters

BRASILIA (Reuters) – Fitch Ratings announced on Thursday that Brazil’s economic performance, which has exceeded expectations, has not improved the country’s public finances. The agency predicts a challenging year in 2025 and a significant increase in public debt.

In its report, Fitch noted that Brazil’s recent economic success may be partly attributed to the government’s lenient fiscal policies. The agency warned that if fiscal conditions are weak during times of growth, they could worsen further in the event of an unexpected economic slowdown.

"Uncertain consolidation prospects are therefore a key macroeconomic vulnerability constraining Brazil’s ‘BB’/Stable sovereign rating," Fitch stated.

Since President Luiz Inacio Lula da Silva took office last year, all three major ratings agencies have either upgraded Brazil’s rating or improved its outlook. However, the largest economy in Latin America is still two notches below the investment-grade status it lost in 2015, following a steep decline in commodity prices and a relaxation of fiscal policies.

Recently, Lula met with representatives from major ratings agencies in New York. He emphasized the importance of communicating Brazil’s current economic situation directly to them during a press conference.

Fitch’s report highlighted that some of the government’s revenue-enhancing measures were seen as "improvisational," indicating a commitment to fiscal targets without providing significant structural improvements. The agency expects the government to eliminate the primary deficit this year, with a tolerance margin of 0.25% of GDP and allowances for extraordinary spending outside the official goal.

However, it adjusted Brazil’s primary deficit forecast for next year to 1% of GDP, up from a previous estimate of 0.7%.

Additionally, Fitch noted that Brazil’s gross debt-to-GDP ratio is anticipated to increase to 77.8% this year from 74.4% last year, and to reach 83.9% by 2026, the final year of Lula’s administration.

"This rise is quicker than previously expected, expanding the gap to the median of 55% within the ‘BB’ category," the agency added.