March 27, 2013 / 10:02 PM / 4 years ago

UPDATE 1-Brazil's weak growth, loose policies may delay upgrade-Fitch

* Debt-to-GDP ratio above those of BBB peers

* Fitch urges reforms, cites heavy tax burden

* Wider yield spreads show foreigners less enamored of Brazil (Adds comment from Brazil’s Treasury secretary)

By Silvio Cascione

SAO PAULO, March 27 (Reuters) - Ratings agency Fitch warned Brazil on Wednesday that weak economic growth and looser budget policies could delay any upgrades of the country’s sovereign credit rating.

Fitch rates Brazil BBB with a stable outlook.

Brazil, Latin America’s largest economy, grew just 0.9 percent last year despite 10 interest-rate cuts in a row and dozens of billions of dollars in tax cuts and other stimulus measures by President Dilma Rousseff.

Brazil’s debt-to-GDP ratio and interest payments are above the median of other countries with the same rating, Fitch noted.

“This could delay an improvement in Brazil’s relative standing within its rating category,” Fitch said in a statement.

Brazil’s Treasury Secretary Arno Augustin dismissed the warning, saying that the low interest rates on the country’s debt abroad show the market remains confident in its economic fundamentals.

“We are at ease with our solid fiscal position and also with how the market reacts” to our fiscal policies, Augustin said in a briefing with reporters.

He added that the government will wait for global markets’ volatility to ease before selling global bonds this year.

The yield of Brazil’s benchmark 10-year global bond fell 0.074 percent to 3.131 percent on Wednesday, below the yields of comparable debt in Turkey and Colombia.

However, a measure of investors’ appetite for risk showed Brazil is becoming less appealing to foreign investors than other Latin American countries with similar ratings. P Morgan’s EMBI+ index showed Brazil’s yield spreads widened nearly 50 basis points since the beginning of the year to 191 basis points, while Mexico’s spreads widened only 29 basis points to 157 basis points.

Wider spreads are a sign of higher aversion to risk.

INVESTMENT GROWTH DECLINES

Brazil has struggled to grow over the past two years due to a cyclical downturn as well as structural issues that require deeper reforms, said Shelly Shetty, head of Fitch’s Latin America sovereign group, in New York.

“A difficult business environment, a heavy tax burden, labor market inflexibility and infrastructure bottlenecks have led to a drop in total factor productivity and investment growth, reducing Brazil’s trend growth,” Shetty said in a statement.

Still, weak growth does not pose an immediate threat to Brazil’s current rating because an expected rebound in economic activity in 2013 should return it to the level of its BBB peers, Fitch said.

Further structural reforms and improvements in growth dynamics could lead to an upgrade in Brazil’s credit in the future, Fitch said.

Brazil, which earned its first investment-grade rating in 2008, has been keen for further upgrades.

“We hope so; that’s what we are working towards,” Brazil Planning Minister Miriam Belchior said at an event earlier this month, when asked if the country should be upgraded. (Additional reporting by Alonso Soto Editing by Bernadette Baum and Jan Paschal)

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