Fitch Ratings increases pressure on Brazil to cut spending

RIO DE JANEIRO Tue Feb 4, 2014 1:39pm EST

RIO DE JANEIRO Feb 4 (Reuters) - Fitch Ratings stepped up pressure on the Brazilian government on Tuesday to cut spending, despite upcoming presidential elections, to maintain the country's sovereign credit rating.

Fellow ratings firms Moody's and Standard & Poor's have already warned they may lower their outlook on Brazil's rating, or even downgrade it in the next few months, if the government does not take action. The three agencies all rate Brazil at the second-lowest investment grade level.

Fitch said that the country's fiscal performance deteriorated further in 2013 as government spending accelerated, while revenues were hurt by sluggish economic activity and tax breaks.

Brazil's public sector primary surplus, or the excess revenue recorded before debt service, declined to 1.9 percent of gross domestic product in 2013, falling short of an official adjusted target of 2.3 percent of GDP. Until recently, Brazil had surpluses above 3 percent of GDP.

If it wasn't for a surge in extraordinary revenues coming from corporate tax settlements and an oil field auction bonus late last year, the country's primary surplus would have been much lower.

"We believe high reliance on nonrecurrent revenues highlights the need for the government to control spending," Fitch analyst Shelly Shetty wrote in a statement.

"This is especially important in the context of moderate economic growth, which will likely constrain a robust recovery in fiscal revenues," she said, adding that a tighter fiscal policy would "enhance the credibility" of Brazilian policies and support the country's "BBB" sovereign rating.

While the finance ministry's press office said it would not comment on Fitch's report, President Dilma Rousseff has vowed to keep spending in check even during an election year in which allies demand more government investment in their voting districts.

Rousseff, who is running for a second four-year term in office in October, has said the administration will announce a budget freeze that should keep the country's debt-to-GDP ratio on a declining trend.

In a bid to appease market jitters, Rousseff told global business leaders in Davos last month that the country was committed to the fiscal responsibility rules that helped the Brazilian economy stabilize after decades of crises.

The country's finances are now under even more scrutiny as investors flee emerging markets on fears that some once-booming developing economies may further slow down.

Fitch currently has a stable outlook on Brazil's rating but suggested it could review its position as it gauges whether the country's fiscal policy "is compatible with a stabilization and eventual decline in the government's debt burden".

Rival agency Standard & Poor's last June revised Brazil's rating outlook to negative, saying there was a one-in-three chance that the country would suffer a rating downgrade over the next two years.

Moody's Investors Service, which in September withdrew the positive view it had on Brazil's rating, said it could slap a negative outlook on that rating later this year if economic growth disappoints while government spending remains high.