Fitch lowers Brazil outlook to 'negative' as crisis deepens

BRASILIA (Reuters) - Fitch Ratings on Tuesday lowered its outlook on Brazil’s credit rating to negative from stable, the latest indication of the severe economic and financial damage being wrought on Latin America’s largest economy by the coronavirus pandemic.

Maintaining its “junk-status” BB-minus sovereign credit rating, Fitch said Brazil’s economy is on course to shrink 4% this year with risks still tilted to the downside, and noted a rapidly deteriorating fiscal position and growing political risks.

“Brazil entered the current period of stress with a relatively weak fiscal balance sheet and low economic growth. The pandemic and the related recession will further increase public indebtedness, eroding fiscal flexibility and increasing vulnerability to shocks,” Fitch said in a news release.

The outlook downgrade comes amid a raft of downward revisions to 2020 gross domestic product growth forecasts and increasingly weak economic indicators.

Fitch’s -4% GDP forecast is in line with consensus, according to the central bank’s latest “FOCUS” survey of economists, but a growing number of forecasters, including the World Bank and International Monetary Fund, are going for -5% or more.

Figures on Tuesday showed that industrial production in Brazil plunged by 9.1% in March, taking the level of output back to where it was 17 years ago. The sector is now 24% smaller than its peak in May 2011.

Fitch expects the government’s general budget deficit, including interest payments, to widen to 13% of GDP this year, almost double the median 6.8% of GDP for countries with a “BB” credit rating.

Similarly, it expects Brazil’s overall debt-to-GDP ratio to hit 79.4% this year, up from 75.8% last year and considerably higher than the current median of 58.4% across countries with a “BB” rating.

“Given the high uncertainty of the pandemic’s duration, additional fiscal measures ... cannot be ruled out,” Fitch said, adding that “challenges could arise with new spending initiatives to stimulate the economy post-crisis or an extension of the existing measures, especially in the context of limited flexibility to cut discretionary spending.”

Reporting by Jamie McGeever; Editing by Sandra Maler and Leslie Adler